Option Investor

Daily Newsletter, Saturday, 11/12/2016

Table of Contents

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

Market Wrap

Best Week in Five Years

by Jim Brown

Click here to email Jim Brown

The major indexes posted monster gains on the back of the Trump victory as the investing thesis for the last eight years was reversed.

Weekly Statistics

Friday Statistics

Last weekend we had the "longest losing streak since 1980" for the S&P. In only five short days that turned from a four month closing low on Friday to a record high this Friday. It is amazing how fast the market can turn when the information changes the outlook for portfolio managers.

Analysts believe the period of "monetary stimulus and stagnation" has ended and we are entering a period of "fiscal stimulus and growth." While this has not happened yet, it is likely to begin in 2017.

The last time republicans controlled all three branches of government was from 2003-2007 during the Bush presidency. The first 2 years they only had a 1 vote majority in the senate and the country was still reeling from the 9/11 attack and the war in Iraq. Still, the S&P rose from the March 2003 low of 789 to the 2007 high of 1,576 or almost 100%. Bush did not have a fiscal stimulus mandate. He was fighting a war and that caused a lot of division and distraction.

The market is in rally mode because of what managers believe will be a stimulus economy. Trump has promised to rebuild roads, bridges, airports and communities. Promises are easy to make. Living up to those promises is a lot more difficult. Temporarily, the markets are in panic mode.

Investors have been invested in dividend stocks, big cap tech stocks, staple stocks and consumer discretionary stocks. Those were the "safe" areas in an economy growing at just over 1% GDP.

Since Tuesday's victory, materials, industrials, banks, defense, aerospace, transportation, mining and energy stocks have been winners. Safe stocks like KO, PG and MO along with big cap tech stocks like AMZN, FB, GOOGL and NFLX have been sold to raise money to invest in the sectors expected to thrive under a Trump presidency.

This has been an excellent example of sector rotation. Sectors that were expected to suffer with further regulation under a Clinton presidency have prospered over the last several days.

Portfolio managers have also been dumping bonds and treasuries to raise money for equities. Under the current assumptions about a Trump presidency, the Fed will be free to hike rates and the government will be selling another trillion in new debt over the next four years to finance the rebuilding of American infrastructure. Both of those are a recipe for higher rates. This caused a major spike in treasury yields as investors ran for the exits.

The dollar rallied to a ten-month high on expectations for a return to growth and a rise in interest rates. This crushed commodities with gold falling from the $1,338 high hit at midnight Tuesday night when the election outcome became apparent, to $1,220 on Friday afternoon. That is a 9% decline in three days.

Early Friday morning somebody sold 85,000 contracts of gold futures worth more than $10 billion and the price fell about $25 dollars. I am surprised it did not drop $100 an ounce. That is a strong testament to the liquidity in our futures markets.

The CME said combined financial and commodity futures set a one-day record on Wednesday with 44,516,949 contracts traded. That beat the prior record of 39,567,064 from October 15th, 2014.

The biggest indication portfolio managers had suddenly turned bullish was the spike in the small caps. The Russell 2000 rebounded +125 points since last Thursdays close at 1,157 to close at 1,282 on Friday. That is a gain of 11% in only six days. The index closed only 13 points below its 2015 historic high at 1,295.80. The Russell had refused to even move close to the high over the summer when the other indexes were in rally mode. This was a pure risk on rally.

The sector that took the biggest hit was the firearms sector. Since Trump is solidly pro gun with several initiatives that would reduce firearms regulation, the gun stocks were crushed. Clinton would have put anti-gun judges on the Supreme Court and had said she would regulate guns by executive order and allow manufacturers to be sued by victims. Sturm Ruger (RGR) fell from $64 to $47 in the three days since the election. The idea is that citizens will not be storming gun stores to load up now that regulations will soften.

The economics on Friday were limited to the Consumer Sentiment Survey for November. Sentiment reversed from the -4 point drop to 87.2 in October with a +4.4 point rebound to 91.6 and the highest level since June. The present conditions component rose from 103.2 to 105.9 but it was the laggard of the two components. The expectations component spiked from 76.8 to 82.5 for nearly a +6 point jump. The October reading was the lowest level since September 2014.

The number of respondents expecting economic conditions to improve surged from 35% in October to 44% in November and the highest level since May.

It will be very interesting to see what the next survey says about the second half of November.

The calendar for next week has 13 speeches by Fed members and you can bet they will be setting the stage for a December rate hike. The election is over, the market is exploding higher, earnings were better than expected and the GDP posted an unexpected rise in Q3. At this point, this is a free rate hike for the Fed. There is no downside risk for them and they may start changing their forecasts for 2017.

The CME FedWatch Tool is showing an 81.1% chance of a rate hike in December. That is pretty close to a sure thing in Fed terms.

It is a good thing the market was already in rally mode because there was very little stock news to generate interest on a Friday.

JC Penny (JCP) reported an adjusted loss of 21 cents that matched estimates. It was their 11th consecutive quarterly loss. Revenue of $2.86 billion missed estimates for $2.95 billion. Same store sales fell -0.8% and missed the +2.2% increase analysts expected. The company revised its full year sales forecast to 1-2% from 3-4%. They said same store sales in the current quarter could rise by 2-5%. The CEO said a warmer than normal September and disruptions caused by the roll out of appliance showrooms in 500 stores, hurt sales.

On Thursday after the close Nvidia (NVDA) reported earnings of 94 cents that beat estimates for 69 cents. Revenue was $2.0 billion and analysts were expecting $1.69 billion. Gross margins rose to 59.2%. Revenue in the video game segment rose by 63% to $1.244 billion. Revenue from the datacenter segment almost tripled to $240 million and should rise sharply in the coming quarters as well. The company announced a 22% hike in the dividend to 14 cents and said it would return $1.25 billion to shareholders in fiscal 2018 in dividends and buybacks. Nvidia guided for revenue in the current quarter of $2.1 billion and analysts were expecting $1.69 billion. Nvidia shares spiked 30% on the news.

Disney (DIS) reported earnings of $1.10 compared to estimates for $1.15. Revenue of $13.14 billion missed estimates for $13.47 billion. Shares dipped from $95 to $91 in the afterhour's session but CEO Bob Iger rescued the stock from a loss on Friday. He said the decline in ESPN subscribers had bottomed. He said ESPN grew in 2016 and was expected to continue growing long term. Iger said Disney was rebuilding the subscriber base through "skinny bundles" designed to be delivered over the Internet through Hulu, Sling, DirecTV and others. He said the various providers are very interested in providing ESPN because that programming is a big selling point for their services. Iger also discussed the next wave of box office blockbusters that would be out in 2017. He also said Shanghai Disney had seen more than 4 million visitors and would break even in 2017. His comments lifted the stock off that $91 low to close at $97.68 with a $2.75 gain.

There are three Dow components reporting next week. Those are Home Depot, Cisco Systems and Walmart. The number of earnings reporters has slowed significantly but there are still some recognizable names. Other than the Dow components, Salesforce.com is probably the most watched event.

Alibaba (BABA) said it sold $17.7 billion in goods during its Singles Day promotion on Thursday. That was 32% higher than the 2015 event but did not compare well to the 60% increase in 2015. When Alibaba first held the event in 2009 there were 63 vendors that took part in discounting their prices. This year there were more than 40,000 vendors, with 30,000 international brands. The impact of the event on Alibaba's bottom line is shrinking. Because of the steep discounts, consumers are now waiting weeks or even months before making their purchases on Singles Day in order to save money. That means the one-day volume is rising but only at the cost of shrinking sales in the month leading up to the day. The profits are less from each item sold because of the steep discounts.

In addition, the SEC and Chinese regulators are investigating how Alibaba accounts and reports Singles Day sales and the Chinese regulator warned the company earlier in the week to avoid fabricating sales figures and misleading advertising.

Valeant Pharmaceutical (VRX) may try to clean up its image by changing its name, according to Bill Ackman. The company was previously called Biovail but changed its name to Valeant after it acquired that Canadian company in 2010 and moved its corporate office to Canada. Ackman said several new names had been discussed but no decision had been made.

Crude prices dipped to $43.03 on Friday after OPEC reported it produced a record 33.64 million bpd in October. That was an increase of 240,000 bpd. It would have been worse but Angola's Dalia field is offline for maintenance and their production declined -165,000 bpd. The largest increases came from Libya, Nigeria, Iraq and Iran. In October, Iran increased production by 210,000 bpd, Iraq 88,300 bpd, Libya 167,500 bpd and Nigeria 170,000 bpd. Those are the same nations that have asked to be exempt from any production agreement. You may remember, OPEC said it was initially going to freeze production. Then they said they would cut production to 32.5 mbpd. Now they claim they are trying to get an agreement to cut production to 32.5 to 33.0 mbpd. Notice, the target is rising and the upper limit is near the current production levels so the cut is reverting to a freeze but the four countries with the biggest production increases want to be exempt.

The odds of getting a meaningful production agreement are very low and the odds of having everyone honor the agreement are zero.

OPEC said demand for OPEC crude would average 32.69 mbpd in 2017. That means the 800,000 bpd surplus in September will rise to 950,000 if production remained level and we know that is not going to happen.

The IEA said demand grew by 1.8 mbpd in 2015, 1.2 mbpd in 2016 and is expected to grow by 1.2 mbpd in 2017.

U.S. production rose from 8.522 mbpd to 8.692 mbpd for the week ended on 11/4. That is the highest production since the week of June 10th but still down from the 9.185 mbpd in the same week in 2015.

Active oil rigs rose by +2 to 452 and gas rigs declined -2 to 115. One miscellaneous rig was deactivated for a net loss of -1 rig for the week.

With the price of oil at $43 and falling, the pace of rig activations is going to slow. There are only a few places in the U.S. where drilling is profitable at $40 oil.




The Dow futures fell about 1,000 points in two days after the Brexit vote surprised everyone with a win that contradicted the polls. In the presidential election the dip was -976 points from the 8:PM high to the 10:30 low at 17,418. That is now being called the "Trexit" dip.

In my Tuesday night commentary the closing sentence said, "Sit back and relax and be prepared to buy any dip." By the time the market opened on Wednesday the majority of the drop had already been erased with the Dow only down about 75 points and the S&P down -14 at the open. If you bought that dip, you should be a happy camper.

The Dow closed at a four-month low the prior Friday at 17,890. This Friday it closed at a new high at 18,847. That was a 959-point rally or 5.36% in just one week. In any view of this chart, this would be an extremely overbought condition. In normal circumstances traders would mortgaging the farm to short this chart. However, these are not normal conditions.

The investing outlook has changed significantly. Sector rotation is rampant and portfolio managers are scrambling to match their investments to the new reality.

Fortunately, that reality is a long way off and there will be some profit taking as soon as the price chasing ends. The market was heavily shorted going into the election as evidenced by the 9 consecutive days of declines. In theory, most of those shorts should have covered by now but there was still some activity on Friday.

The Dow did waffle Friday morning and spent most of the day in negative territory. By the close, the shorts were covering again. Next week should be a different market. The long-term bias should remain bullish but I expect the volatility to continue as the sector rotation continues.

The Dow chart is broken. The sudden sprint should have left the index winded and I would look for support in the 18,600 range. Until we actually see some decent weakness and watch for support to form, any projection is just a guess.

The Nasdaq Composite struggled to touch 5,300 and managed to make another lower high before dropping back to 5,179 on Friday. The damage was almost entirely in the big cap tech stocks as investors rotated out of those names and into the sectors expected to do well over the next four years. This tech weakness should not last but given the current market environment, it is tough to predict a big cap tech rebound. The composite index closed 100 points below its prior highs.

The Nasdaq 100 big cap index fell significantly to below 4,700 on Thursday. There was a flush of the big cap techs that appeared to be a monster sell program at the open on Thursday. The NDX fell from 4,855 to 4,685, a decline of -170 points in less than two hours. That was a real shock to holders of those stocks. The 4,850 level is now resistance with 4,650 as support.

The S&P spiked to 2,182 at the open on Thursday and then faded because the big cap tech stocks are components of the S&P-500. The decline found support just above 2,150 and the 100-day average at 2,148. This should be a decent support level unless the market decides the rally was in error and really tanks.

If you notice the Brexit rebound back in June. After the three days of gains there were four days of indecision and consolidation before the S&P shot up another 75 points. This is what I am expecting for the coming week. I expect some indecision and consolidation and then another leg higher.

The investing outlook has changed as I explained at the beginning of this commentary. Portfolio managers will continue rotating vast amounts of money into the sectors expected to gain over the next four years.

Anyone looking at the Dow chart above should be worried about adding new longs in this market and I do not blame you. That chart is scary. It is however, just 30 stocks. The broader market as evidenced by the S&P is far less bullish and the last two days have already seen consolidation. I would definitely be a dip buyer and a cautious buyer of stocks that have not rallied significantly over the last week.


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Random Thoughts

Wow! Bullish sentiment soared 15.3% for the week that ended on Wednesday. This only included one trading day after the election. The majority came from the neutral camp, which shrunk -10.3% but some of the hard-core bears also converted. This was an amazing reversal showing the election uncertainty is over.

JP Morgan said bond investors lost more than $1.2 trillion last week as a result of the election. The dollar value of the universe of tradable bonds fell from $54.2 trillion to $53.0 trillion. At the same time, the dollar value of global equities rose from $51.5 trillion to $52.3 trillion. On Friday, Deutsche Bank warned the spike in yields and the rise in the dollar will likely unleash the next leg lower for stocks. Somebody is always wrong.

JPM said the reasons behind the Brexit win and the Trump win were the same. Voters were fed up with growing overregulation, taxes and political correctness. They also said market participants had been "de-risking" for the two weeks ahead of the election and suddenly found themselves under invested with the market racing higher. This prompted price chasing in an attempt to catch up and get reinvested again. More than $22 billion flowed into U.S. equity ETFs over the last three days. That was three times more than flowed out in the prior week and the strongest three day streak since January.

Monday November 14th will be the largest super moon since 1948. This will not happen again until the year 2034. The moon will be significantly closer to earth and the light from the moon will be 30% brighter than a normal full moon. The moon will be closest to earth at 6:22 AM ET on Monday morning. However, viewing it Sunday or Monday night will not be appreciably different. Either stay up late on Sunday or set your alarm clocks for Monday morning.

Buy a piece of history that never happened. Newsweek printed and shipped 125,000 magazines celebrating Hillary Clinton's historic presidency. They were so confident that she was going to win they printed the edition and shipped it. There was an immediate recall on Wednesday morning but some had already been sold. If you missed it at the local magazine stand, you can buy one on Ebay for about $225. Newsweek apologized and said they will have a new Trump edition out next week.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices."

James Grant


New Plays

Getting Oily

by Jim Brown

Click here to email Jim Brown
Editor's Note

I looked at hundreds of small cap stocks and the charts are all broken. Anything worth buying spiked 10% last week. This chart of Navient is an example. The stock wandered sideways for months while we owned it and then suddenly spiked 30% the last three days on the election news. It is going to be tough to find small cap stocks to own until there is some profit taking and consolidation.


FTK - Flotek - Company Profile

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Buy FTK shares, currently $11.71, initial stop loss $10.71.

No options recommended because of price.


No New Bearish Plays

In Play Updates and Reviews

Small Cap Blowout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 surged +31 points on Friday to close within 2 points of a historic high. The big cap stocks rested on Friday with alternating positive and negative periods. The Russell 2000 triggered massive short covering when it moved past strong resistance at 1,255.

I warned on Thursday the market was due for a rest and we got that in the big caps but they managed to close positive for the day with the exception of the S&P, which closed with a 3 point loss.

Unfortunately, we are still due for some additional profit taking before we move significantly higher in 2016. The gains are just too strong in a short period of time.

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

No Changes

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

MENT - Mentor Graphics - Company Profile


No specific news. Another nice gain in a positive market. New closing high.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long Jan $30 call @ $1.35, see portfolio graphic for stop loss.

Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss

RCII - Rent a Center - Company Profile


No specific news. New 4-week high.

Original Trade Description: November 9th.

Rent-A-Center, Inc., leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2015, the company owned and operated approximately 2,672 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,444 Acceptance Now kiosk locations in 40 states and Puerto Rico; 532 Acceptance Now direct locations; and 143 stores in Mexico, as well as franchised 227 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

For Q3, the company posted earnings of 11 cents compared to estimates for 9 cents. Revenue of $693.9 million missed estimates for $698.4 million. Same store sales fell -8.4% but that was actually better than the 9.8% estimates. For the full year they guided to earnings of $1.05-$1.15 and revenue of $2.07 to $2.10 billion.

On the surface those results were terrible. The CEO said the "Q3 earnings were negatively impacted by unexpected capacity-related system outages following the full implementation of our new store information management system within our core U.S. stores" and he was "terribly disappointed." Fortunately, the problem is now behind them and Q4 is normally a strong quarter.

Earnings Jan 25th.

Shares crashed from $13 to $8 on the earnings and have now rebounded over the last four weeks to $11. The trend over the last month has been steady and there is no reason to expect that to change over the next month. If the market is going to be positive now that the election uncertainty has passed, then the stock should do well.

Position 11/10/16 with a RCII trade at $11.25

Long RCII shares @ $11.25, see portfolio graphic for stop loss.

Long Dec $12.50 call @ 20 cents, no stop loss.

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


Ebay was up with the Nasdaq today. It was also up as news broke that people who bought the new NES Classic Edition game console for $59 before it sold out, are now selling them on Ebay for $200 to $500. Amazon is still advertising them at $59.95 but when you click on the link the page will not load because the traffic is so high.

Original Trade Description: October 31st.

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Position 11/1/16:

Long Dec $28 put @ .72, see portfolio graphic for stop loss.

Previously closed 11/10/16: Short EBAY shares @ $28.51, exit $28.75, -.24 loss.

VXX - Volatility Index Futures - ETF Description


The VXX rallied on the crash in the big cap tech stocks. This should be temporary but the market is due for a rest.

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.

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.

HOV - Hovnanian Enterprises - Company Profile


No specific news. Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery.

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

Previously Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.

HUN - Huntsman Corp - Company Profile


No specific news. New 52-week high on Thursday. Minor decline on Friday. Our $20 call expires next Friday so it will take a strong move to finish in the money.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call.

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.

Update 10/28/16: Huntsman reported earnings of 38 cents that beat estimates for 35 cents. Revenue of $2.36 billion missed estimates for $2.49 billion. Free cash flow was $300 million after an early repayment of $100 million in debt. The announced the filing of a Form 10 registration statement for a spinoff og the Pigments, Additives and Textile Effects businesses expected to occur in the first half of 2017.

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.

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