Option Investor

Daily Newsletter, Saturday, 1/14/2017

Table of Contents

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

Market Wrap

Five Week Pattern

by Jim Brown

Click here to email Jim Brown

For the last five weeks, the Dow has traded in a narrow 250-point range and still has not hit 20,000.

Weekly Statistics

Friday Statistics

Despite the downgrade of nearly a third of the Dow stocks last week the index managed to maintain its sideways pattern. Volatility increased slightly as the intraday moves became sharper but every dip was bought and every spike was sold. Eventually this will end with an explosive breakout or breakdown but as of today there is no indication on the Dow.

The move will probably come on a series of headlines that change market sentiment. That could be an earnings miss by Goldman Sachs or a tweet from Trump. We will not know until it happens.

Conventional wisdom seems to be predicting a "sell the inauguration" trade but everybody has been wrong for the last five weeks so it will be interesting to see if analysts get it right this time. We know there is a correction in our future but it could be next week, next month or next summer. Nobody can predict it in advance.

Friday was active in the economic arena. The anxiously awaited retail sales for December rose +0.6% compared to +0.1% in November. However, that was below the consensus estimates for 0.7% and the Moody's forecast for 0.8%. On the surface, that was a good number but we know there is always a fly in the soup if you look at the internals.

Gasoline sales rose +2.0% thanks to rising oil prices. That is never a good number to report. Motor vehicles and parts rose +2.4% as winter kicked in and sales of things like antifreeze, window scrapers and 4WD vehicles kicked into high gear. For the bad news electronics and appliance sales fell -0.5%, food and beverage -0.3%, general merchandise -0.5% and food service and drinking establishments -0.8%. I am having a hard time understanding why bars and restaurants saw sales decline during the holiday season when it is normally standing room only. Building materials rose +0.5%, furniture +0.5%, sporting goods +0.2% and nonstore retailers +1.3%.

If it were not for autos and gasoline, the headline number would have been a lot different. Actually if you exclude autos and gas the headline number would have been zero change and that was for the holiday shopping season. Retail stocks of all flavors sank on this news.

The Producer Price Index for December rose +0.3% after a +0.4% rise in November. Analysts were expecting a +0.3% gain. The report has been showing a slight increase in inflation for 3 of the last 4 months. The price of goods rose +0.7% and service costs rose +0.1%. If you annualize the prior three months the inflation rate would be 2.6% and the strongest since July.

Food prices rose +0.7% to account for 80% of the headline gain. Energy prices rose 2.6% and have risen by at least 2.5% in 3 of the last 4 months. The PPI for personal consumption items rose only 0.2% and half the rate from November. This report would suggest the Fed will hike rates in March but not n February.

Inflation could take flight if there is a border tax. Every item that is taxed by 10% will see that retail price rise by 10%. This could spike inflation very quickly.

Business inventories exploded higher in November with a 0.7% spike compared to the -0.2% decline in October. That is the biggest one-month gain since January 2013. Sales rose only +0.1%. Inventories rose 1% at both wholesalers and retailers. Given the weak holiday shopping season these inventories could linger for months. However, autos and parts were a big weighting once again with a 1.9% gain.

Consumer sentiment surprised analysts with a minor decline after two months of post election gains. The headline number fell from 98.2 to 98.1 so it was a miniscule move but analysts were expecting a rise to 98.7. This is the first reading for January so there is still a good chance it will move higher later in the month.

The present conditions component rose from 111.9 to 112.5 and the expectations component slipped from 89.5 to 88.9.

The headline number has risen more than 10 points since the 87.2 reading in October and indicating consumers were excited about the election outcome or maybe just excited to get the election behind us.

The weak retail sales caused the Atlanta Fed real time GDPNow forecast for Q4 to tick down one tenth to 2.8% growth. The forecast has been reasonably steady between 2.5% and 2.9% since early December.

The market is closed on Monday for Martin Luther King Day and Tuesday's lone report is not going to move the market. The Beige Book on Wednesday and the Philly Fed Manufacturing Survey on Thursday are the most important for the week.

This could be a holiday week atmosphere with some states recognizing Friday as an actual holiday because of the inauguration. The economics are not going to be as important as the earnings and the Friday event. Those will be the market movers.

The earnings calendar is heaviest on Wednesday and Thursday. There are five Dow components reporting including UNH, GS, IBM, AXP and GE. The Goldman/Citigroup earnings on Wednesday morning will be a high point as will the Netflix earnings after the close. IBM is always a market mover on Thursday after the close and they are likely to have some serious issues with the strong dollar.

Friday was bank earnings day. Bank of America (BAC) reported earnings of 42 cents compared to estimates for 38 cents. That was a 47% increase in earnings. Revenue of $19.99 billion missed estimates for $20.62 billion. They said the spike in trading after the election helped increase profits. Trading revenues rose 11% to $2.9 billion. Non-interest expenses fell 6% thanks to an aggressive cost-cutting program. They expect to cut $5 billion from annual expenses by 2018. The bank said they would earn an extra $600 million in Q1 thanks to the recent Fed rate hike in December. Shares closed only fractionally positive due in part to the large post election gain in anticipation of good earnings.

JP Morgan Chase (JPM) said earnings rose 24% to $1.71 per share ($6.73 billion) and that beat estimates for $1.43 per share. The bank said trading volume rose 15% after the election. Revenue rose 2% to $24.3 billion and just barely beating estimates for $24.2 billion. Expenses declined -3% to $13.8 billion. Fixed income trading revenue rose 31% to $3.37 billion. Equities trading revenue rose 8.1% to $1.15 billion and slightly below estimates for $1.29 billion. CEO Jamie Dimon said conditions were very positive for a good 2017. He cited rising business confidence, increased capex spending, rising consumer sentiment, higher energy prices, increased home construction and household formation, rising interest rates and the potential for decreasing regulation and lower taxes. He said the fixed income market was heating up and the strong dollar meant there was more activity in the currency markets as companies hedged against that risk.

Wells Fargo (WFC) reported earnings of 96 cents ($4.87 billion) that missed estimates for $1.00. Revenue of $21.6 billion missed estimates for $22.4 billion. Non-interest expenses rose 4.9% to $13.22 billion due to high legal costs from the account opening disaster.

Wells Fargo is moving to a cardless ATM system for their 18.8 million users. The customer would have to use the app in their smart phone. It would give them a secondary 8-digit code that they input into the ATM along with their PIN. This would prevent stolen cards and skimmers attached to ATMs. They will be the first bank to implement this across their entire network.

Wells Fargo shares gained the most of the banks reporting earnings and yet they had the biggest miss. Investor expectations were not as high.

Blackrock (BLK) reported earnings of $5.14 ($851 million) compared to estimates for $5.02. Revenue of $2.89 billion missed estimates for $2.94 billion. Assets under management rose 11% to $5.1 trillion. The iShares ETF portfolio saw $49.3 billion of net inflows into equities. The company boosted its quarterly dividend from $2.29 to $2.50.

The CEO said the market is about to enter a new phase where president-elect Trump's promises are about to hit the reality of implementation and congressional roadblocks. The market has been bullish on the expectations but that is likely to fade once he is in office.

It was a good day for the FANG stocks and they helped power the Nasdaq to a new high. Netflix was upgraded from sell to hold by Deutsche Bank. Shares gained $4.52 to$133.70 despite the DB price target only being raised to $110. The DB analyst said the subscriber trajectory internationally would enable the company to beat Q4 guidance. Helping push the stock higher was comments by Mott Capital that Netflix was involved in a major paradigm shift in the video market. Mott said Netflix was creating the "on-demand generation" which watches what they want, when they want it. Mott said Netflix was only owned by 55% of funds at year end and there was plenty of room for new investments.

Hotel in-room entertainment integrator Enseo said Netflix was 40 times more popular than porn in hotel rooms. Only 1% of occupied hotel rooms order a paid on-demand movie compared to 40% that stream Netflix videos through the Enseo service. Previously hotels generated about 90% of their on-demand revenue with porn titles. Enseo also said Netflix always ranks in the top three networks in any hotel room where it is available.

RBC Capital expects the company to report 1.46 million new U.S. subscribers and 3.75 million new international subscribers. Clearly, the bar has been set high but that is not high enough for Deutsche Bank. They expect 4.35 million new international subs.

Facebook (FB) was upgraded by Raymond James from outperform to strong buy with a price target of $160. Shares closed at $128. The average analyst price target is $155. The consensus estimate for ad growth is 35% compared to 55% in 2015. The analyst said even though Facebook had said they plan to invest aggressively in 2017, the street is forecasting 41% and the average guidance for the last three years has been 8.5% higher than the actual spending. Raymond James is expecting only 34% expense growth. In a recent survey, Facebook had an 81% usage rate in the core age groups compared to 47% for Messenger and 32% for Instagram. In the 18-29 age group usage was even higher at 90%, 64% for Messenger and 62% for Instagram. Facebook was also ranked as the "most important" social app in the 18-29 group. In another survey user engagement was robust in December after a soft start to the quarter, leading RJ to forecast strong revenue. They expect revenue of $8.25 billion or 46% year over year growth. The analyst said their surveys did not show a migration to SnapChat as others had feared. Shares gained $1.72 on the news. Earnings are Wednesday after the close.

Alphabet (GOOGL) finally confirmed it has shutdown another moonshot project called Titan. The project was testing highflying drones to beam internet service to areas not currently serviced by fiber. The drone project was cancelled in early 2016 but was just confirmed this week. They acquired Titan in 2014. The company they acquired was working on a project to create highflying drones that could stay aloft nonstop for years. Facebook bid against Alphabet for Titan in 2014. When they lost the bid they paid $20 million for Ascenta, a UK based drone company and their efforts are still underway. Alphabet's Department X, which is responsible for moonshot projects, said they are still working on delivering remote access through Project Loon, which uses high altitude balloons.

The company is also scaling back on its fiber optic cable project, robotics and modular smartphones. They are also attempting to sell their satellite business to Planet Labs.

Boeing (BA) confirmed a deal with India's SpiceJet for 205 planes worth $22 billion at list prices. The deal includes 100 new 727 Max 8s plus 55 already on tentative order and an option for 50 more. SpiceJet operates an all Boeing fleet. The 737 is Boeings most popular plane ever. Analysts believe Boeing will add more rows of seating to the planned 737 Max 10X plane that could launch in 2020. They are currently talking to customers about interest in that version before actually announcing it. They will also announce a new midsized plane that will compete with the Airbus A321neo. Just last week Boeing announced an order from GE's aircraft leasing division for (75) 737 Max 8s. That raises GE on order total to (170) 737s. On Wednesday a Czeck airline ordered five 737 Max 8s. Boeing sold more than 500 of the 737 models in 2016 and they are already off to a strong start for 2017. They have an order backlog that will take them 8 years to deliver. Earnings are January 25th. Shares are currently stuck at the 2015 historic high and a break over $160 could be strong. However, given the post election ramp, any weakness in the earnings could be a temporary disaster.

With only 30 of the S&P-500 companies having reported earnings for Q4 the blended growth rate is at +3.2% but that could change dramatically as the cycle progresses. For the Q4 cycle, 78 companies have issued negative guidance and 34 have issued positive guidance. The forward S&P-500 PE is 17.0 based on expected earnings of $133.49. Factset believes with the average upside surprise we could see final earnings growth of 6% or better for Q4. Over the past five years, the average reported earnings have exceeded early quarter estimates by 4.5%. On average, 67% of S&P companies report better than expected results with the rest of the companies either meeting or missing estimates.

Crude prices produced a drag on the Dow last week with a $3.50 decline over two days. The rebound on Wed/Thr helped but the longer-term outlook is still down as reports are likely to show fewer production cuts than previously announced.

However, the rebound in crude prices from the February lows of $26 will be a boost to earnings for the energy sector. That will support the S&P even if crude prices are soft. If they really tank on production cut realities those better earnings will not help.

There was a shocking drop in active rigs last week with oil rigs declining -7 to 522. Analysts theorize this was hangover from the holidays where rigs were slow to reactivate as they moved from one well location to another. Producers may have given workers some extra time off or possibly the harsh weather kept some from being moved. The mountain states and West Texas has some very cold and snowy weather over the last ten days. The key will be how many are active next week. We could have a strong post holiday rebound.




Sellers tried and failed to push the markets lower. They tried on Wednesday and the afternoon rebound was strong and lifted the Dow back into positive territory. They tried hard on Thursday and managed a new intraday low for the week but once again the rebound was strong and the -181 point low for the day turned into only a 63-point loss. With that kind of dip buying the sellers will eventually run out of conviction and/or stock to sell.

It is hard to pick a direction for next week because of the inauguration on Friday and the number of analysts claiming it will be a sell the news event even if there are no terror attacks or civil disobedience headlines. It is hard to side with the bearish forecasts because of the strong dip buying. Personally, I worry about the potential for an attack but the market has shaken off every mass casualty event in the last year. Getting close enough to harm the presidents would be practically impossible and that is the only thing that could really shake up the market.

If the event comes off without any major disaster, I would expect that to be positive for all the investors that are worried about a disruption. Anyone selling the event could see a rush of dip buyers eagerly buying their stock.

We would go crazy trying to second-guess what the market might do surrounding the event. The best course of action would be to follow the trend until the trend changes. Unfortunately, the trend has been flat for five weeks except for the Nasdaq. Inside that flat trend, the S&P is actually ticking slightly higher. That suggests we are more than likely going to have a break out than a break down. We cannot go by the Dow because of its narrow 30 stock composition. Nearly one-third of those stocks were downgraded last week and the index only lost 78-points for the week. The S&P lost 2 points. That is hardly bearish in the midst of all those downgrades. Note that the candles for last week are all clustered near the top at that 2,275 resistance.

The Dow traded more in the middle of its range but on Wednesday, there was a real effort to reach 20,000 that failed at 19,973. On Thursday, the Dow traded down to the bottom of its range at 19,770. That was a 200-point swing only to end up right back in the middle of the range on Friday. There is no trend other than sideways.

The bank earnings on Friday did not impact the Dow materially because the outlooks were good despite some random misses in the numbers. Jamie Dimon was responsible for some bullish sentiment in the afternoon after his positive view of the economy and the financial sector.

There are five Dow components reporting earnings next week and Goldman Sachs and IBM will have the most impact on the Dow. IBM did not warn. I do not know if that is good or bad. They could be saving some bad news on the dollar and lower revenue in order to be offset by better than expected earnings. Goldman should report blowout numbers because of the increased trading in Nov/Dec but the market is expecting blowout numbers so there could be a sell the news event there.

There is no conviction by either the buyers or sellers so we are likely to continue moving sideways until we get a headline that alters the status quo.

The Nasdaq Composite has been up for 8 of the last 9 days. The index closed at a new high on Friday thanks to the big cap stocks with strong gains in PCLN, TSLA, NFLX, FB and AMZN along with a resurgence of some of the biotech names that were crushed on Wednesday.

With earnings for those same stocks fast approaching there should be some concerns about post earnings volatility and that could/should blunt any further gains next week. Netflix reports on Wednesday and IBM on Thursday. I know IBM is not a Nasdaq stock but as a giant tech stock it does impact the sector.

The small cap Russell 2000 is normally our market sentiment indicator and leads the big caps both up and down. I guess you could say it has done a good job of leading the Dow since it had the same sideways pattern for the last five weeks. Support was broken intraday on Thursday but the dip buyers rushed in and lifted the index back to the middle of its recent range.

Unlike the S&P, which is clustering at resistance, the Russell candles are clustering at support. Whether that means the S&P is about to lead us higher or the Russell is about to lead us lower is for fortune tellers to determine because there are no technical clues.

Touching 20,000 on the Dow is no longer the key. Surviving the volatility in a shortened, low volume week with numerous headline events will be the challenge. I know the urge to trade is hard to resist. However, I seriously doubt anyone's financial future will be ruined by waiting until next Monday to enter the market.

I made a mistake last week when I said the EOY special would close at midnight Sunday. I forgot this was a three-day weekend. The special will close at midnight on Monday. That will give all the procrastinators plenty of time to get their tax-deductible subscription for 2017.

Random Thoughts

The volatility from last week shook the confidence of the bulls and there was a slight movement back to the cautious side of sentiment. However, the decline was minimal and at 43.6% that is still well over the average. This survey ended on Wednesday.

Last week results

Russell Investments CIO Jeff Hussey is predicting the S&P will end 2017 at 2,100. That is an 8% decline from Friday's close and the lowest forecast on the street that I have seen. He blames the high valuations with the Russell 2000 at a PE of 23. He said profit margins are very high and they tend to revert. He warned that wage growth, inflation, strong dollar and interest rates would be a challenge. He also said the Fed was emptying the punchbowl and there was no tsunami of cash flowing into the market from the Fed as in the last several years. Hussey is definitely in the minority in the analyst community.

Parents spend an average of $233,610 raising a child until they become an adult. That is old news. A new survey by the Dept of Agriculture found that grandparents are also subject to large cash outlays. Grandparents reported they spend on average $2,383 per child to benefit their grandkids. That includes gifts, extra-curricular sports or tutoring, clothes, school supplies, outings, etc. Grandparents routinely help with childcare, carpool, house cleaning, babysitting, homework help, etc. Parents in the survey valued the contribution to these efforts at about $300 per week or $15,600 a year.

Millennials waited longer to have kids because of high school loans but low wages and full time jobs mean more expenses for childcare. More than 25% report receiving physical support from parents and 18% report receiving regular financial support. More than 43% of grandparents said the children did not ask for the support but it makes the grandparents feel "happy" to be able to help. However, more than 25% have dipped into their retirement savings to supply the support, 15% say they spend less time enjoying their own life and 8% have had to postpone retirement because of the financial support. Source

The chart below is from TD Ameritrade.

ISIS is calling Inauguration Day, "Bloody Friday" and calling on followers to attack the proceedings in any way possible. Officials are preparing for a massive security presence to protect against everything from high-speed truck attacks to attacks by bomb or biotech laden drones. Officials are expecting as many as 750,000 demonstrators but organizers are hoping for 1.2 to 1.5 million.

Attendees to the inauguration are not expected to reach the 1.9 million that attended President Obama's event in 2009 but they do expect more than one million people at the capital. More than 1,200 busses bringing in attendees have received parking permits.

There are three-dozen law enforcement agencies plus more than 7,500 Guardsmen from around the country along with more than 3,000 police officers from other states. There are two main problem areas. The first is the capital ceremony and the second is the 2.5 mile parade route.

The DisruptJ20 group claims they will target everything from the parade to the balls and plan to use blockades and protestors to stop traffic, public transit and parties.



Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Be decisive. Right or wrong, make a decision. The road of life is paved with flat squirrels who could not make a decision."



New Plays

Under Attack

by Jim Brown

Click here to email Jim Brown
Editor's Note

Drug companies are under fire about prices and some are at ground zero. Big companies like Bristol-Myers are getting hit by the Trump comments but it is the small companies like Endo International that may be hurt the worst.


No New Bullish Plays


ENDP - Endo International - Company Profile

Endo International plc develops, manufactures, and distributes pharmaceutical products and devices worldwide. Its U.S. Branded Pharmaceuticals segment offers chronic pain management products, such as BELBUCA, OPANA ER, and Percocet; Lidoderm for opioid analgesics; and Voltaren gel for osteoarthritis pain, as well as XIAFLEX for treating Peyronie's and Dupuytren's contracture diseases. This segment also provides Supprelin LA for central precocious puberty treatment; testosterone replacement therapies, such as Aveed and TESTOPEL, as well as Fortesta and Testim gels; Frova and Sumavel DosePro for migraine headaches; Valstar, a sterile solution for intravesical instillation of valrubicin; and Vantas for the palliative treatment of prostate cancer. The company's U.S. Generic Pharmaceuticals segment provides tablets, capsules, powders, injectables, liquids, nasal sprays, ophthalmics, and transdermal patches for pain management, urology, central nervous system disorders, immunosuppression, oncology, women's health, and cardiovascular disease markets. Its International Pharmaceuticals segment offers specialty pharmaceutical products in various therapeutic areas, including attention deficit hyperactivity disorder, pain, women's health, and oncology; generic, branded generic, and over-the-counter products in the areas of dermatology and anti-infectives; injectables for the treatment of pain, anti-infectives, cardiovascular, and other therapeutics areas; and healthcare services, products, and solutions to hospitals, pharmacies, and practitioners, as well as for government healthcare programs. The company also provides Monarc subfascial hammock to treat female stress urinary incontinence; and Elevate transvaginal pelvic floor repair system for the treatment of pelvic organ prolapse. It sells its branded pharmaceuticals and generics directly, as well as through wholesale drug distributors. Company description from FinViz.com.

Endo is a small $3 billion market cap company but they have been around since 1920. They are headquartered in Dublin Ireland and could easily be impacted by an import tax. They do have some common products and they do have earnings.

Endo has been benefitting from raising drug prices and a study underway to determine how much companies have raised prices over the last ten years is bound to highlight Endo as a serial hiker. The company already warned that the pricing environment was going to remain challenging in 2017 with 30% year over year declines in generics. If the new replacement for Obamacare does require bidding for generic drugs as Trump has mentioned, Endo could be under a lot of pressure. Add in the import taxes and it could be ugly. Investors are anticipating these events and the stock is falling.

On Thursday somebody bought 4,000 February $12.50 put for 70 cents. That is a $280,000 bet they are going lower. If Trump repeats his desire for lower drug prices in the inauguration speech, the drugs companies are going to collapse again.

Earnings February 7th.

Sell short ENDP shares, currently $13.19, initial stop loss $14.35.

No options recommended because of price and spreads.

In Play Updates and Reviews

Sideways Trend

by Jim Brown

Click here to email Jim Brown

Editors Note:

For five weeks now, the Dow and S&P have been stuck in a sideways trend. The Nasdaq is the only index with an actual vertical trend and that has been very strong. The Dow opened positive but faded into negative territory by noon. A late afternoon buying surge almost lifted it back to positive but ended with a -5 point decline. The S&P also opened positive and managed to remain barely positive all day to end with a 4-point gain.

There was afternoon selling across all the indexes but the dips were bought once again. Because this was a Friday before a 3-day weekend that was bullish and suggests we could see a rally next week assuming we avoid a lot of negative headlines. The conventional wisdom nearly everywhere is to sell the inauguration so we will see if the herd has it right or wrong.

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

ARWR - Arrowhead Pharmaceutical
The long stock position was entered at the open.

VXX - VIX Futures ETF
The short position remains unopened until a trade at $24.50.

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

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

ARWR - Arrowhead Pharmaceuticals - Company Profile


No specific news. Minor profit taking ahead of the holiday weekend.

Original Trade Description: January 12th.

Arrowhead Pharmaceuticals, Inc. develops novel drugs to treat intractable diseases in the United States. Its pre-clinical stage drug candidates include ARO-HBV to treat chronic hepatitis B virus infection; ARO-AAT to treat liver disease associated with alpha-1 antitrypsin deficiency; ARO-LPA to reduce production of apolipoprotein A; ARO-AMG1, which is developed against an undisclosed genetically validated cardiovascular target; and ARO-F12, a potential treatment for factor 12 mediated diseases, such as hereditary angioedema and thromboembolic disorders. The company also develops ARO-HIF2, a drug candidate for the treatment of clear cell renal cell carcinoma. Arrowhead Pharmaceuticals, Inc. has collaboration and license agreements with Amgen, Inc. The company was formerly known as Arrowhead Research Corporation and changed its name to Arrowhead Pharmaceuticals, Inc. in April 2016. Company description from FinViz.com.

Arrowhead shares were crushed back in November on bad news but have been rebounding since December 23rd. On Monday Silence Therapeutics announced it has acquired six million shares and an 8.4% stake in ARWR. Silence is developing its own RNA technology that could be a competitor to Arrowhead or synergistic to Arrowhead.

Arrowhead said it was not informed of the stake until just a few minutes before Silence made the public announcement. Arrowhead said there have been no discussions about a potential transaction. Now that Silence has an 8.4% stake and has proven it is serious, those discussions could begin.

There is no guarantee the stock will continue moving higher on this news but I am sure there are other investors also following the headlines and willing to bet a couple bucks a share that something will happen and there will be further headlines.

Earnings March 15th.

Position 1/13/17:

Long ARWR shares @ $2.27, see portfolio graphic for stop loss.

I am not recommending them but the March $3 calls are 25 cents.

BAK - Braskem S.A. - Company Profile


No specific news. Minor profit taking ahead of the holiday weekend.

Original Trade Description: January 11th.

Braskem S.A., together with its subsidiaries, produces and sells thermoplastic resins. Its Basic Petrochemicals segment offers olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene, and butene-1; BTX products comprising benzene, toluene, ortho-xylene, para-xylene, and mixed xylenes; fuels, including automotive gasoline and liquefied petroleum gas; intermediates, such as cumene; and other basic petrochemicals, which include ethyl tertiary butyl ether, solvent C9, and pyrolysis C9. This segment also supplies electric energy, steam, compressed air, and other products to second-generation producers. Its Polyolefins segment produces polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, and EVA; green polyethylene from renewable resources; and polypropylene. This segment's products are used in plastic films for food and industrial packaging; bottles, shopping bags, and other consumer goods containers; automotive parts; and household appliances. Its Vinyls segment produces polyvinyl chloride, caustic soda, chlorine, hydrogen, caustic soda flake, and sodium hypochlorite. The company's USA and Europe segment produces polypropylene in the United States and Germany. Its Chemical Distribution segment distributes solvents, including aliphatic, aromatic, synthetic, and ecologically-friendly solvents; engineering plastics; hydrocarbon solvents and isoparafins; and general purpose chemicals, such as process oils, chemical intermediates, blends, specialty chemicals, and pharmaceuticals. The company also imports and exports chemicals, petrochemicals, and fuels; produces, supplies, and sells utilities, such as water and industrial gases; and provides industrial services. The company was formerly known as Copene Petroquimica do Nordeste S.A. and changed its name to Braskem S.A. in 2002. Company description from FinViz.com.

In early December, Braskem announced a potential settlement in a probe that was started in 2014 when controlling shareholders Odebrecht and Petrobras (PBR) became a target in a corruption scandal. Between 2006-2014 the company had paid $250 million into an account created by Odebrecht to pay bribes to politicians and political parties in Brazil.

The potential settlement would allow those shareholders to eliminate their ownership and the money collected be divided between the USA, Switzerland and Brazil. The deal would formally erase any potential liabilities for Braskem. On December 14th Braskem said it was paying $920 million in fines over six years with half paid now and the rest paid in annual installments starting in 2018 Source

JP Morgan immediately upgraded the company from neutral to overweight.

Braskem is the largest petrochemical in South America.

Shares have been moving up steadily now that it is free from the probe that has weighed on shares for the last two years. The prior high was $32.

Earnings Feb 9th.

Position 1/12/17:

Long BAK shares @ $23.11, see portfolio graphic for stop loss.

No options recommended because of the wide spreads.

HZNP - Horizon Pharma - Company Profile


No specific news.

Original Trade Description: January 7th.

Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer. Company description from FinViz.com.

Horizon recently received approval to sell the drug Quinsair in Canada. It was already approved in the EU. This is a drug for the management of chronic pulmonary infections in adults with cystic fibrosis. Only about 75,000 people around the world are candidates for the drug and 4,500 in Canada. They acquired the drug when they bought Raptor Pharmaceutical Corp in October.

The company also announced they had received a Notice of Allowance from the U.S. Patent office on the drug Ravicti. This will result in a patent being issued to Horizon that is good to 2030. Horizon has seven patented drugs and 11 drugs currently available for sale.

Shares of Horizon declined in early December after a late stage trial on another drug failed to achieve the desired result. Shares have been moving up steadily since that December drop. Friday's close was a 4-week high.

Horizon will present next week on the 10th at the JPM Healthcare Conference.

Earnings Feb 6th.

I am putting an entry trigger on the position just in case the market decides to roll over on Monday.

Position 1/9/17 with a HZNP trade at $17.75

Long HZNP shares @ $17.75, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


The Russell ETF posted another gain but closed well off the opening highs. There is simply no direction in this market other than sideways.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


No specific news. Just waiting on the next headline.

Original Trade Description: January 9th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.

VXX - Volatility Index Futures - ETF Description


The VXX actually posted a gain as traders bought puts ahead of the 3-day weekend.

Original Trade Description: December 28th

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 done 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 began.

We exited the last short at $26.65 for a $7 gain back on December 13th. I am expecting the January volatility to lift the VXX back to $30. That will give us a great entry for the expected market rally in Feb/Jan where the VXX will crash again.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. 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. We may have to rotate in and out a couple times but it will eventually go to $10. Once we are in the position and profitable I will put a trailing stop loss on it. If the stop is hit 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.

I am putting an entry trigger on the position at $29.50, a level we saw on December 1st. I would expect this to be hit in early January. The VXX could rise well over $30 if the market really corrects so I am not putting a stop loss on the position until the correction is over.

With a VXX trade at $24.50

Short VXX shares, currently $21.40, no initial stop loss.

No options recommended because of price.

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