Option Investor

Daily Newsletter, Saturday, 9/17/2016

Table of Contents

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

Market Wrap

All Quiet

by Jim Brown

Click here to email Jim Brown

Quadruple witching Friday was quiet but ships can still sink in a calm sea.

Weekly Statistics

Friday Statistics

The markets gapped lower at the open and the Dow declined -140 at the lows. However, once those morning lows were reached, the markets moved quietly sideways the rest of the day. The last hour saw a sharp increase in volume as option positions were settled, the S&P rebalanced and a new S&P sector created for REITs. These events caused volume to spike from 6.7 billion shares on Thursday to 9.6 billion shares on Friday. Internals were 3:1 decliners over advancers but the indexes other than the Dow, remained relatively flat.

The Biotech Index was the exception with a -2.3% decline when the rest of the indexes were only down an average -0.35%. Pushing the sector lower was disappointing news from Novavax (NVAX) on a phase 3 trial. The company said the 3 Resolve trial on an experimental RSV F vaccine "did not demonstrate vaccine efficacy" in the prevention of a lower respiratory tract disease. The trial covered 11,850 patients. In the earlier trials, the RSV vaccine had shown a significant decrease in respiratory illness. In the 3 Resolve trial, the patients receiving the vaccine instead of a placebo actually had a higher incidence of infection.

Shares of NVAX crashed -85% because the drug was expected to generate $6 to $8 billion. Now those hopes have been crushed.

On the economic front, the Consumer Price Index (CPI) rose +0.2% in August and that lifted the chance of a Fed rate hike next week from 12% to 15%. Rising inflation towards the Fed's target of 2.0% is a key metric. The consensus was for a gain of +0.1% after a zero gain in July. The core CPI, excluding food and energy, rose +0.3%.

The headline CPI is now up +1.1% year over year and the core CPI is now up +2.3% and the Fed will be taking notice. This will be a heavily discussed topic at next week's Fed meeting.

Helping to push the headline CPI higher was a +2.9% rise in utility bills. Food prices were unchanged overall but food prices at home declined. Meats, poultry and eggs fell -0.4%, nonalcoholic beverages declined -0.1% and "other" food fell -0.2%. Food away from home rose +0.2%.

One major problem area was medical costs. Medical care costs rose +1.0% and the largest monthly gain since 1982. Medical care services rose +0.9% after a +0.5% rise in July. Hospital services rose +1.7% after a +0.4% increase in July. Physician services rose +0.7% for the second consecutive month and medical care commodity prices rose +1.1% after a +0.4% rise in July. The Affordable Care Act has proven not to be affordable.

The futures probability for a rate hike next week rose from 12% on Thursday back to 15% on Friday. That means there is an 85% chance they will not hike rates. If they did hike with probability that high, the market would decline significantly. The market has almost completely priced out the potential for a rate hike. Meanwhile the odds of a December rate hike have risen to 56.5%

Consumer sentiment for September was unchanged at 89.8 and only -0.2 below the July reading. That means sentiment has been practically unchanged for three months after a high of 94.7 in May. However, the internal components shifted dramatically. The present conditions component declined from 107.0 to 103.5 and the lowest level since October while the expectations component rose from 78.7 to 81.1. Fewer people said it was a good time to buy a car or other major household item.

I believe this is the impact of the political contest. With the mudslinging in high gear and the candidates talking about how bad things are, the consumer is starting to believe them.

The calendar for next week is of course headlined by the Fed announcement and the Yellen press conference. While the Fed is not expected to raise rates, Yellen may point directly at the December meeting as a likely target. If she begins preparing the markets this far in advance, the impact should be minimal.

Of almost equal importance this week is the Japanese monetary policy update at 1:AM on Wednesday. The BoJ is expected to take some kind of policy action. Analysts speculate they will cut interest rates again and push rates farther into negative territory. They are also expected to adjust the asset purchase program, possibly adding more stock and ETF purchases. They are also likely to change their bond purchases by adjusting the duration of securities it will purchase. Some analysts believe they will stop buying long dated bonds, therefore allowing long rates to rise while short-term rates continue to be negative.

The BoJ promised a major report on the direction of monetary policy at this meeting and analysts have been speculating for weeks what that could reveal. Like the ECB the BoJ is running out of bonds to buy. They have already acquired the majority of securities in the market.

The ECB said it was going to maintain the status quo and not increase its QE program. If the BoJ announces the same watch and wait strategy, it will enforce the idea that central banks have run out of ammunition and ideas and it could be market negative.

If the overseas central banks have reached the end of their policy cycle while the Fed is prepared to begin hiking rates, it could upset the risk parity trade, where investors have allocated so much money for equities and so much for bonds with the idea they will balance each other out. If bonds begin selling off in volume, it could upset those ratios and upset the equity market.

The following week we will get the last revision to the Q2 GDP, which was at +1.1% growth in the August revision. The Q2 number is not expected to post a material change. However, the Q3 GDP estimates are suddenly falling sharply after a couple weeks of negative economic data.

In early August, the Atlanta Fed real time GDPNow was predicting +3.8% growth for Q3. That has fallen to +3.0% but the rate of decline is accelerating. This is another reason the Fed would have trouble hiking rates in September. They need to see if this trend is going to continue. The Fed has never hiked rates, until last December, with the GDP below 3.5% growth. With our current growth at +1.1% the data demands no rate hike or the Fed would lose what little credibility it currently has.

UnitedHealth (UNH) shares spiked nearly $3 after the Obama administration told insurers they would not be reimbursed for the billions in 2015 losses. This was expected. However, the Dept of Health and Human Services (HHS) invited insurers to join in lawsuits against the government in order to win future financial settlements over the failure to pay. That is the first time I can remember that one department of government recommended suing another in hopes of financial gain.

The HHS memo confirmed that any funds collected by the government would first be used to shrink the $2.5 billion insurance shortfall from 2014 and no funds would be available for repayment of 2015 losses. The "risk corridor" program was designed to transfer funds from insurers that made money from Obamacare to insurers that lost money under the program. Any "excess profits" of more than 3% of premiums paid were to be paid in to the government to be distributed to other insurers with "excessive losses" of more than 3%. This is the third and final year of the risk corridor program and that is why the majority of insurers have dropped out of the Obamacare program.

The insurance program is a failure because the younger, healthier consumers failed to sign up, and older, sicker consumers signed up but could not pay and the insurers ended up with much higher costs. For 2014, the excess profits paid into the government were just $362 million while the excess losses were more than $2.9 billion. It is widely known that losses were even higher in 2015 but the government has not released the numbers because it would be a further admittance the program was failing. The 2016 calendar year is expected to be even worse. With no excess profits to compensate for excess losses, the insurers are fleeing the program like rats from a sinking ship.

The suggestion by DHS that insurers sue the government for their losses caused stocks in the sector to spike on Friday.

This is the text of that specific section of the memo from HHS.

We know that a number of issuers have sued in federal court seeking to obtain the risk corridors amounts that have not been paid to date. As in any lawsuit, the Department of Justice is vigorously defending those claims on behalf of the United States. However, as in all cases where there is litigation risk, we are open to discussing resolution of those claims. We are willing to begin such discussions at any time." In other words, sue us, then we will settle with you out of a different bank account called the Government Judgment Fund. And, "HHS recognizes that the Affordable Care Act requires the Secretary to make full payments to issuers. HHS will record risk corridors payments due as an obligation of the United States Government for which full payment is required." The key here is that Congress must authorize the funding and it has been specifically cut off since it was a side deal the president made with insurers after Obamacare was passed and signed into law.

Twitter (TWTR) shares rallied 4.4% after their first NFL live-stream broadcast on Thursday night. There was an average of 243,000 Twitter viewers throughout the broadcast and that was only a fraction of the 15.7 million people that watched on TV. Some 2.3 million Twitter viewers clicked in for a few seconds, probably to see what the fuss was about, but many left almost immediately. The average Twitter viewing time was 22 minutes.

The actual reviews were actually good but most said it was unlikely they would ever watch more than a few minutes on Twitter because of the screen size on the mobile phone and the lag time, which some said was 30 seconds or more. There were many complaints about the pause to "buffer" before the transmission could continue. These are all growing pains for the Twitter effort to become more relevant.

The problem for Twitter is that the 2.3 million unique viewers is now a benchmark that future NFL streams will be weighed against. If over the next several weeks that number declines on a weekly basis, the positive hype surrounding the effort will quickly turn into a death knell as analysts predict the end of streaming.

Deutsche Bank (DB) was hammered after the U.S. Justice Dept asked the bank to pay $14 billion in fines over the subprime mortgage disaster in 2008. The bank was expecting a fine of $2.0 to $3.0 billion. The bank already paid $1.9 billion in 2013 to settle similar claims. They said they "have no intent to settle these potential civil claims anywhere near the number cited." DB said the negotiations have just begun and they are sure the eventual settlement will be more in the range of settlements with other banks.

Unfortunately, for DB there have been some whopper settlements. With the EU taxing authority asking for $14 billion in back taxes from Apple, there may have been a little payback in the number requested from DB.

Aug 2014, $16.6 billion, Bank of America
Nov 2013, $13.0 billion, JP Morgan
Jul 2014, $7.0 billion, Citigroup
Apr 2016, $5.1 billion, Goldman Sachs
Feb 2016, $2.6 billion, Morgan Stanley
Feb 2016, $1.2 billion, Wells Fargo

Dow component Intel (INTC) raised its Q3 revenue guidance to $15.6 billion give or take $300 million. That compares to the prior guidance of $14.9 billion give or take $500 million. The company said they underestimated PC demand. Gross margin is expected to be 62%, up 2% from the prior estimate. R&D is expected to rise $100 million to $5.2 billion and the Q3 tax rate at 22%. They made the announcement on Friday because their quiet period before Q3 earnings on Oct 18th began at the close on Friday. Shares spiked 3% on the news.

Citigroup (C) shares were down slightly after Goldman Sachs cut the bank from buy to neutral and removed it from the focus list. Goldman said Citi's earnings failed to materialize and the 7.7% return on equity was well below management's 10% target. "We do not see a path to meaningful inflection without an improvement in the macro environment." Goldman said Citi's capital returns may be prohibited under the 2017 stress test rules.

The market would be in a different place this weekend were it not for Apple (AAPL). Monday's low was $102.53 and shares hit $116.13 on Thursday. That was worth approximately +108 Dow points and it is the largest weighting in the Nasdaq 100 at 14.6% and responsible for 41 points of the +172 point rebound from Monday's lows.

Not only did Apple rock the indexes but the stocks in the Apple food chain were also up strongly. AVGO, SWKS, QRVO, NXPI, QCOM and CRUS were all up on expectations for higher sales. That powered a strong rebound in the Semiconductor Index to a new high at Friday's open.

Without the gains from Apple and its suppliers, the markets would probably have closed significantly lower for the week. Instead the Dow closed with a minor +0.2% gain for the week while the Nasdaq 100 gained a whopping +2.9% along with a +2.3% gain in the Nasdaq Composite.

Amazon (AMZN) garnered some upgrades on Friday. Evercore raised their price target to $1,015 and the highest on the street but RBC Capital Markets was right behind them at $1,000. RBC said an independent survey found that Amazon likely had 60 million Prime accounts. They also said Amazon had sold more than 7 million Echo devices powered by their Alexa Voice Service. In their survey, many homes with an Echo had more than one. Even with that market penetration, they have only scratched the surface. Recently in a discussion with hedge fund managers, the common assumption was a double in Amazon's share price over the next three years.

Another new product Amazon is pushing is the "Dash Button." This is a WiFi enabled button you can get for almost any product you can buy at Amazon. In the example graphic below, there is a Dash button for Tide laundry detergent. You place the button on or around the washing machine using the self-adhesive backing. When you are about to run out of Tide you push the button. The button communicates with Amazon over WiFi and two days later Tide arrives on your doorstep courtesy of Amazon Prime free shipping. The button is programmed when you receive it through an Android or Apple smartphone. You tell it which product/quantity you want whenever the button is pushed and then place it in an appropriate location. I am amazed at the gimmicks Amazon comes up with to further hook you as a permanent Prime customer. The button costs $4.99 to buy but the first time you use it you will receive a $4.99 credit so basically it is free.

This will be so handy that millions of Amazon customers will order buttons for things they would normally buy at the local grocery store. Having a button means no shopping list, fewer bags to carry in from the store and probably fewer trips to the store. Need more coffee, toilet paper, Red Bull, trash bags, kitty litter? Push the button. Amazon Page

I have no doubt Amazon shares will reach $1,000. It is only a matter of time.

Tesla shares may have found a new bottom at $195 after Elon Musk said a new version of the Autopilot will be available next Wednesday. The new software will rely more on radar than on cameras in order to help the software "see" what is going on around the car and better avoid collisions. Radar was added to the cars in 2014 but it was initially supposed to supplement the cameras. There will also be a driver penalty for failing to obey the commands to take control of the wheel. If a driver repeatedly ignores those commands, the car will park itself and the driver will have to restart it in order to engage the "Autosteer" mode again. Musk said, while the update will make the autopilot much safer it does not mean "perfect safety." "Perfect safety is really an impossible goal."

Abbott Labs (ABT) shares rallied 2% after the company said Johnson & Johnson (JNJ) was buying its medical optics unit for $4.325 billion in cash. That unit was responsible for just over 5% of Abbott's revenues in 2015. This will include ophthalmic products in the company's cataract surgery, laser refractive surgery and consumer eye health segments.

Gilead Sciences (GILD) may finally be ready to go on a shopping spree. They are selling $5 billion in debt that will close on the 20th. Jefferies pointed out that unlike prior debt deals the prospectus added the words "future acquisitions" to the phrase regarding the use of the funds. The "general corporate purposes" language was enhanced. In prior debt deals, there was no reference to acquisitions. After the debt sale is concluded next week, the company will have $29.5 billion in cash on hand and its outstanding debt will rise from $22 billion to $27 billion. Analysts are now suggesting Gilead may not do just one acquisition but potentially several acquisitions to really beef up their future drug portfolio. Gilead is scheduled to announce the results from nine clinical trials over the next three months. Companies mentioned as potential Gilead targets include CLVS TSO VRTX and KITE. Clovis would be my bet.

Real estate is now the 11th S&P sector. REITS and real estate companies have been removed from their prior home in the Financial Sector and given a home of their own. For the Global Industry Classification Standard (GICS) this is the biggest event in 15 years. The flurry of new REITS over the last several years has been strong enough to warrant their own classification and it will be a dividend producing beauty. The stocks in the sector will hold trillions of dollars in real estate and their market cap is in excess of $900 billion. The last GICS change in 2001 allowed REITs to be included in the S&P indexes. The S&P indexes now include more than 90 REITs with 26 included in the S&P-500. Analysts believe the sector could see new investments of as much as $30 to $100 billion because of the new focus. A quick review of several REIT charts found that nearly all had been in sharp decline over the last week. I am using Digital Realty (DLR) in the chart below.

Netflix (NFLX) was sued by Twenty-First Century Fox (FOXA) for illegally hiring two of its employees while they were still under contract with Fox. The two employees were a former drama-programming executive and a film promotion executive. A Netflix spokesman released this comment. "We intend to defend this lawsuit vigorously. We do not believe Fox's use of fixed term employment contracts in this manner are enforceable. We believe in employment mobility and will fight for the right to hire great colleagues no matter where they work." Netflix shares were up $2 on Friday but the news did not break until just before the closing bell.

Oil prices declined on Friday as OPEC production increased. Exports from Nigeria and Libya are increasing now that internal problems in those countries are fading. Libya lifted the force majeure from its main port after the military seized the port from rebel control. In Nigeria, Exxon is preparing to export Qua Lboe crude for the first time in months with the first cargo to load next week.

Earlier in the week, the IEA reduced its forecast for demand growth by -100,000 bpd for 2016 and -200,000 bpd in 2017. The agency said a supply glut could continue through the first half of 2017.

The Algerian energy conference will be Mon-Wed starting on the 26th and some OPEC countries have agreed to meet unofficially on the sidelines to discuss a production freeze. The result of this meeting will provide for direction to Russia and Saudi Arabia when they meet at the end of October. The official OPEC production meeting is not until Nov 5th.

Analysts are starting to talk about oil in the $30s again but it is just speculation at this point.

Baker Hughes pointed out that more than 100 active rigs have been reactivated since May. While that is encouraging the total today is only 506. We would have to reactivate more than 1,425 additional rigs to return to the 1,931 peak from August 2014. Everything is relative.




The Dow did not make a 1% move on Friday but it came close when it was down -140 points at the lows. The Dow and S&P are exhibiting extreme volatility with the last six days of dramatic movement. The S&P is now stuck under resistance at 2,150, which was support for the prior 8 weeks. The 2,120 level is now support and a breakdown there should find additional support at 2,100.

The Dow and S&P both have lower high patterns but until they make a lower low, it is just consolidation. Typically, the market is positive on the day before a Fed announcement. However, the last two months have been anything but typical. With the chances for a rate hike at only 15% the market "should" ignore the risk and continue the historical trend. However, investors are very nervous about the market. The number of high profile hedge fund managers coming out with market warnings in recent could keep retail investors on the sidelines.

The market is approaching an inflection point. Next week is the fifth week of the most volatile six-week period in the year. If negative volatility does not appear next week, it probably will not appear the week after either.

Fund managers are looking for a serious dip to buy stocks for their October 31st fiscal year end window dressing. They typically do that in the middle of October. If a decline does not appear this week, they may accelerate those buys and the normal end of October rally could start early.

As long as the S&P remains above 2,100 next week, that could be a signal there will be no further selling and the funds could begin buying stocks.

The Dow has a similar level of new support at 18,000. Despite the big gains by Apple last week the Dow only managed to gain 38 points for the week but the highlight is that 18,000 did not break. As long as we can say that same thing next weekend, we should begin to see positive moves.

There is not likely to be any headlines moving Dow stocks next week but anything is always possible. We were not expecting the guidance upgrade from Intel but it appeared.

The Nasdaq 100 big cap index ($NDX) is only 13 points from a new closing high over 4,831 thanks to Apple and the chip stocks. Any continued gains by the Apple gang could push the index to a breakout and that would be positive for market sentiment. At this point, it would be a good bet that any October rally will be led by tech stocks because funds will be adding those stocks that have performed the best in order to dress up their portfolios.

The Nasdaq Composite Index is 39 points below its closing high at 5,283. The composite index is dragging a lot of dead wood along with it but it could still make a new high if the Apple gang continues to post gains.

The biotech sector was a major drag with a -2.3% decline on Friday. However, the sector was up +1.3% for the week in spite of Friday's loss. Biotechs are probably the main reason the composite index did not keep up with the Nasdaq 100.

The Nasdaq has been rising all week so it does not have the clear support line that we see on the Dow and S&P. With the index back over 5,200 it does bring that prior support back into play.

On the Russell 2000, the strong pattern of gains over the last two months finally broke but the support at 1,205 held on the initial dip and the index did not retest the August lows at 1,200. This is strong for sentiment and we need that 1200-1205 range to continue to hold until the broader market turns positive. This may be the only dip fund managers are going to get so any light weakness next week could be bought.

This is important. All the major indexes closed down on Friday with the Dow down -140 at the lows. However, the Volatility Index ($VIX) declined -6% suggesting nobody was worried about a further market drop. The VIX is calculated on the price for puts on the S&P. Put prices rise when there is a lot of demand and decline when demand drops. A declining VIX means limited demand for puts and is bullish for market sentiment.

With time expiring on the worst six week period of the year and the markets failing to extend the losses from the prior Friday, I am borderline bullish for the next two weeks. We still have to cross over the Fed announcement pothole on Wednesday and then hang on for another week or so but the lack of a material decline during this period is market positive.

There is one more hurdle we have to cross and that is the first presidential debate on the following Monday. That is a wildcard for the markets and you never know what will be said and how the market will react. That is especially true this election season.

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Random Thoughts

Bearish sentiment spiked a whopping +7.4% with a lot of neutral investors suddenly turning bearish. The bulls are shrinking as heightened volatility tends to turn people cautious.

At the Delivering Alpha hedge fund conference last week there was an abundance of negativity and most of it revolved around negative rates and the end of the debt cycle. Hedge heads were unanimous that negative rates were a serious danger and without a return to normal soon, there would be a monster bubble that could destroy the global markets.

Former Treasury Secretary Tim Geithner called the market "dangerous" and "scary." "I think the scarier things are really about politics, the scary erosion of the pragmatic center in politics, the diminished capacity to make sensible economic choices, something governments really have to do."

Carl Icahn said, "You look at the environment, and I think it's very dangerous. You're walking on a ledge and you might make it to the end, but you fall of that ledge and you're really going to see trouble."

Ray Dalio said he saw a "dangerous situation" in the debt markets. "There's only so much you can squeeze out of the debt cycle, and we're there globally. You can't lower interest rates more."

Paul Singer said, "I think it's a very dangerous time in the global economy and global financial markets."

Goldman Sachs Peter Oppenheimer warned that staying invested in stocks and bonds is an "unacceptable risk." He recommended selling bonds, the S&P-500 and Europe's Stoxx 600 "due to elevated valuations across assets and the risk of shocks."

"We see strong positioning, headwinds from the resumption of the Fed rate hike cycle and a strong dollar, and increasing political uncertainty into the U.S. elections."

Given the many bad market calls from Goldman Sachs over the last two years, this could be a contrarian indicator leading to a market rise.

Will the last employee out please turn off the lights. On Friday, Sears Holdings, which owns Kmart as well, informed employees in 13 states their stores would be closed in December. They will begin liquidation sales on September 22nd. One newspaper said a total of 60 stores would be closed.

Separately, Seritage Growth Properties, a REIT that owns 235 Sears and Kmart stores, revealed in a SEC filing that Sears had given notice of termination for leases on 17 Kmart stores.

Sears previously announced the decision to close 80 stores starting in July. Kmart operates about 870 stores today, down from 1,300 in 2012.

Moody's warned earlier in the week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

Empty Sears store in Richmond Virginia. Center shelves have been removed instead of sitting empty.

A 58-year-old warehouse worker in Scotland took a picture that is believed to be a new photo of the Loch Ness Monster. The Loch has been searched repeatedly using every technology known to man but no signs of a monster creature have ever been found. Still, these pictures continue to surface periodically and at least this one is clear and in focus.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The greatness of a man is not how much wealth he acquires, but in his integrity and his ability to affect those around him positively."

Bob Marley

New Plays

Optical Super Cycle

by Jim Brown

Click here to email Jim Brown
Editor's Note

With the rapid adoption of the cloud for everything an optical super cycle has developed. As the data in the cloud increases at an exponential rate, the need to move and access that data quickly over fiber optic cables has also exploded. I am adding two companies in the same sector with a slightly different focus.


NPTN - Neophotonics Corp - Company Profile

NeoPhotonics Corporation develops, manufactures, and sells hybrid photonic integrated optoelectronic products that transmit, receive, and switch high speed digital optical signals for communications networks. It offers high speed products, including transmitter, receiver, and switching products for 100G (gigabits per second) and optical transmission applications over distances of 2 to 2,000 kilometers; and optical components for coherent systems, including narrow line width tunable transmit and local oscillator lasers (NLW-ITLA), which generates ultra-pure wavelength, or color for coherent transmission, as well as integrated coherent receivers (ICRs), which decodes the phase and polarization encoded coherent signal. The company also engages in developing pluggable coherent modules that combine NLW-ITLA with ICR and with a coherent modulator; and offers 100G products for the client side and datacenter applications, as well as components, such as externally modulated lasers and high-speed drivers. In addition, it offers network products and solutions, including application-specific passive optical functionalities in modules or sub-system configurations; and products for test and measurement, instrumentation, industrial, and research applications. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents that beat estimates for 13 cents. However, revenue of $99.1 million narrowly missed estimates for $100.7 million. For Q3 the company guided to revenue of $100-$106 million and earnings of 9 to 17 cents. They guided for 20% revenue growth for the rest of 2016 and 25% growth from 2017 through 2019.

The company held an investor day last week and said China would be a big part of the company's growth in that 2017-2019 period. China Mobile (CHL) is the biggest wireless phone company in China and their request for proposals to supply equipment suggest a 30% to 60% increase in orders over the 2016 rate. Also, Verizon is planning a network upgrade to 100 Gbps in all its metro areas and that will mean a lot of business for NPTN according to Piper Jaffray. Needham raised the price target to $22 after the investor day.

Other companies expected to benefit from the super cycle are OCLR, AAOI, LITE, IHI, FN, ACIA and CIEN.

Earnings Nov 7th.

NPTN closed at a new high on Thursday and pulled back only slightly on Friday in a weak market. With analysts raising estimates after the investor day, I think it will continue to set new highs. Shares broke over resistance at $16.50 on Sept 7th. That should now be uptrend support.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

With a NPTN trade at $18.30

Buy NPTN shares, initial stop loss $16.30.

No options recommended.

AAOI - Applied OptoElectric - Company Profile

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

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

With an AAOI trade at $22.10

Buy AAOI shares, initial stop loss $19.25

No options recommended.


No New Bearish Plays

In Play Updates and Reviews

Ready for Next Week?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow was the biggest loser by far after dropping -140 points intraday. The index rebounded at the close to lose only -88 but the big caps were still the weakest market. The small caps dipped only slightly with the S&P-600 losing -1 point and the Russell 2000 only -2 points. This would seem to suggest there was very little concern about event risk going into the weekend. That also suggests we could see further gains next week.

Tuesday is typically positive ahead of a Fed announcement but in this quarter, nothing has been typical. The risk is not the day before the announcement but the day after the announcement. Even if the Fed fails to hike rates the statement and press conference can cause trouble. Also, there is rarely a big move on the day of the announcement but the day after has been known to move significantly.

We are headed into the 5th week of the most volatile six weeks of the year so we are not out of the woods yet. There is always the potential for a last minute dip before the normal end of October rally.

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

BOX - Box Inc
The long stock position was opened with a trade at $14.74.

SWHC - Smith & Wesson
The short stock position remains unopened until a trade at 26.45.

WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.

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BULLISH Play Updates

BOX - Box Inc - Company Profile


No specific news. The position was entered at the open and shares only declined -11 cents in a weak market.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.

PTLA - Portola Pharmaceuticals - Company Profile


No specific news. Nice gain in a weak market.

The company will be presenting at various sessions at the Annual Neurocritical Care Society Meeting from Sept 15-18th.

Original Trade Description: September 12th.

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

Position 9/14/16 with a PTLA trade at $22.25

Long PTLA shares @ $22.25, see portfolio graphic for stop loss.

(Wide stop loss because of the market volatility. I will raise it when it makes sense.)

BEARISH Play Updates

SWHC - Smith & Wesson - Company Profile


No specific news. Minor gain in a weak market but still a gain when I would have expected a decline. We are still not triggered so there is no harm in letting a few dip buyers take positions.

This position remains unopened until a trade at $26.45.

Original Trade Description: September 14th.

Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility; provides metal processing and finishing services comprising tooling, forging, heat treating, finishing, plating, and plastic injection molding, as well as engineering support services to third-party customers; and licensing of trademarks to third parties. Company description from FinViz.com.

Smith & Wesson has been posting some outstanding earnings thanks to rapidly rising gun sales only those sales are slowing now that Trump has pulled even or slightly ahead of Clinton. Trump is pro gun and Clinton is anti gun. As long as his numbers are improving, gun sales are likely to slow. However, should Clinton surge into the lead again, the numbers will rocket higher. Consumers are not going to spend hundreds of dollars to buy another gun if they think their gun rights will be safe for another 4 years. If Clinton surges into the lead again, they will be out in force buying those "extra" guns. The biggest surge will occur if Clinton wins the election on Nov 8th. At that point we want to be long every gun manufacturer and ammunition maker.

Shares have sold off despite great earnings and raised guidance because FBI background checks slowed in August to only a 6% rise compared to 37% growth in July and 39% in June. The actual number of checks fell from 2.19 million in July to 1.85 million in August.

Earnings Dec 1st.

With a SWHC trade at $26.45

Short SWHC shares, initial stop loss $27.45

No options recommended because of price.

VXX - Volatility Index Futures - ETF Description


The VIX/VXX actually went down in a weak market. That should be a clue for next week.

There was a major increase in volatility only a couple days after we entered the position. There will be ups and downs. Just hang in there and the long-term trend will always be down.

If you are not already in this position the spike today would be an excellent place to enter a new short.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

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.

Position 9/7/16:

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

No options recommended because of price.

WFM - Whole Foods Market - Company Profile


No specific news. No material movement.

On Thursday 9/15, more than 5,500 of the Nov $28 puts were purchased at $1.72 to more than double the open interest of 3,800.

This position remains unopened until a trade at 27.75.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.

I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

With a WFM trade at $27.75

Short WFM shares, initial stop loss $28.75

Optional: Buy Nov $25 put, currently .60, no stop loss.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

FDC - First Data - Company Profile


No specific news. Shares are still holding just under resistance at $14, which is also our call strike. If the market were to rally, I believe that resistance would be broken.

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 Oct $14 call @ .50, no stop loss.

Previously closed 9/9/16: Long FDC shares @ $13.50, exit $13.75, +.25 gain.

HOV - Hovnanian Enterprises - Company Profile


No specific news after the earnings miss the prior Friday.

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.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

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.

HUN - Huntsman Corp - Company Profile


No specific news and the big decline that started last Thursday, continued this week.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call that will be tracked in this section.

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.

Position 8/30/16 with a HUN trade at $17.65

Long Nov $19 call @ 54 cents. No stop loss.

Previously Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.

NAVI - Navient - Company Profile


No specific news. Shares fell back to support and the two-month range is still intact. 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

RDN - Radian Group - Company Profile


The market drop on 9/9 stopped us out of the stock position at $13.35 for a minor gain. The long call was still open but only had 4 days to run. It was a $14 call with RDN at $13.83. The continued weakness in the market kept RDN from rebounding and the call expired.

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

Expired 9/16/16: Long Sept $14 call @ .15, exit zero, -.15 loss.

Previously closed 9/12/16: Long RDN shares @ $13.15, exit $13.35, +.20 gain.

SKX - Skechers - Company Profile


Skechers shares failed to decline to the $22 strike price on our long put. The option expired worthless.

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:

Closed 9/16/16: Long Sept $22 put @ .55, expired, -.55 loss.

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

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