Option Investor

Daily Newsletter, Tuesday, 6/20/2017

Table of Contents

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

Market Wrap

Oil Greases Market Slide

by Jim Brown

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Oil prices dipped under $43 intraday and the energy sector became a drag on the market.

Market Statistics

Crude prices dipped to $42.75 ahead of the July futures expiration at the close. That is a 7-month low and down from the $55 high in February. Besides the obvious problem of the futures expiration, news from Libya and Nigeria about rising production put additional pressure on excess global supplies. Production in Libya has risen from 260,000 bpd to nearly 900,000 bpd over the last few months after they worked out a revenue sharing agreement with militias holding and guarding the fields and ports. Libya has the capability of producing 1.6 million bpd once they repair the damage from the civil war.

Nigeria's production rose 50,000 bpd to 885,000 after Shell ended a force majeure on Bonny Light crude several weeks ago. The pipelines damaged by militants in the long running confrontation with the government, are being repaired and production is expected to continue rising.

U.S. production has rebounded from 8.428 million bpd in July of last year to 9.330 million bpd last week. The recent peak was 9.61 million bpd in June 2015. Current is only about 280,000 bpd below the peak and represents a whopping 902,000 bpd increase in just the last year. Analysts expect U.S. production to rise to 10.0 million bpd by the end of 2017.

If you add the increase in production from the US, Libya and Nigeria over the last year you get 1.792 million bpd and that almost exactly offsets the 1.8 million bpd that OPEC began cutting on January 1st to offset rising supplies. That means global inventories are declining slower than previously expected and prices may not rise as OPEC expected. The June/July/August period is peak oil demand in the US and Europe. Unfortunately, despite the low gasoline prices, oil demand has flat lined and not rising as in prior years.

This is due to the new ability to export ultra light shale oil to Europe. This was approved last year and exports are now up to more than one million bpd. Before we could export WTI, refiners used that oil here to refine into gasoline and diesel and that was exported to Europe. Gasoline exports are down significantly and therefore oil demand in the US is also weak. One million bpd is 7 million barrels a weak in reduced refinery demand.

On the positive side, analysts believe oil has either reached its low or that $40 will be the bottom. Since many shale drillers cannot make a profit under $45 per share, this means fewer rigs will be activated and the pace of the production increases will slow.

After the bell, the API Inventory report showed a -2.7 million-barrel decline for the week ended on Friday. Inventories at Cushing declined -1.27 million barrels and that is the 11th consecutive weekly decline. If the EIA inventories on Wednesday morning also show a significant decline, we could see an oil rebound begin and energy equities should follow.

There were no economic reports worth discussing today. For tomorrow, the existing home sales will garner attention followed by the new home sales on Friday. The Kansas Manufacturing Index on Thursday is normally ignored.

The big event for the week is the Russell rebalance on Friday. The volume will be extreme and could be well over 10 billion shares when normal is about 6.5 billion. The Russell is likely to be under pressure the next three days as some fund managers pre sell the deleted stocks to beat the Friday rush. Fortunately, the Russell typically rises the week after the rebalance as managers adjust their positions and continue adding the new stocks added to the index.

After the bell, Adobe (ADBE) reported earnings of $1.02 that beat estimates for 94 cents. Revenue of $1.77 billion also beat estimates for $1.73 billion. They guided for the current quarter to earnings of $1.00, up 33%, compared to estimates for 97 cents. Revenue guidance was for a 24% rise to $1.815 billion and analysts were expecting $1.8 billion. Annualized recurring revenue rose $312 million to $4.56 billion. Digital media revenue rose to $1.21 billion and 68% of total revenue. Shares rose $5 to $146 in afterhours. I have been waiting for weeks for Adobe to report so we can add them to the portfolio on any post earnings depression.

FedEx (FDX) reported earnings of $4.25 compared to estimates for $3.87. Revenue rose from $13.0 billion to $15.7 billion and narrowly beat estimates for $15.6 billion. The company said higher rates and higher volumes powered the gains.

The company said it was considering "peak pricing" after competitor UPS said it would hike rates and impose surcharges during the peak end of year shopping period. FDX also said it was considering charging more for oversize items. FDX said they wanted to make sure they were compensated fairly for the investments they made to deliver outstanding performance during the holiday shipping period.

The company guided to earnings of $13.20 to $14.00 for the full year and analysts were expecting $13.61. In 2016, the company reported $12.30 in earnings. They said they were in discussions with Boeing on some "opportunities" but would not say which planes they were considering. Boeing said last week they were going to convert some 767s to a freight configuration because of higher demand for that size and configuration.

FDX is probably looking over their shoulder at the 40 freighters Amazon Prime is currently operating to move packages around the country. Prime Air is likely to grow as Amazon expands. During the last holiday shopping season the USPS became the delivery agent to customer homes on packages under the USPS size and weight limit. Where I live, USPS had to add capacity to handle the Amazon deliveries. UPS and FDX only delivered to me a couple times each in Nov/Dec. USPS still managed to lose money. Government run businesses never prosper even with record volume.

La-Z-Boy Incorporated (LZB) reported earnings of 57 cents that easily beat estimates for 46 cents. Revenue of $12.7 million beat estimates for $401.1 million. Same store sales rose 2.4%. The CEO was upbeat about all segments with margins rising along with sales. The company saw a shift to premium, higher priced products, which is surprising given the weakness in retail in general. I guess if you build it they will come. Shares rose 11% in afterhours.

Red Hat Inc (RHT) reported earnings of 56 cents compared to estimates for 52 cents. Revenue of $676.8 million beat estimates for $646.7 million. They guided for the current quarter to earnings of 67 cents and revenue of $694-$702 million. Analysts were expecting 65 cents and $676.9 million. For the full year, they guided for earnings of $2.66-$2.70 and revenue of $2.79-$2.83 billion. The company said they were seeing "robust global demand for our products and increased commitments from our largest customers." Shares spiked $9 in afterhours.

Cowen & Co upgraded McDonalds (MCD) from market perform to outperform and raised the price target from $142 to $180. The analyst said McDonalds had done an outstanding job launching popular innovations on its menu and increasing value initiatives. They raised estimates for same store sales in 2017 and 2018 from 2.2% and 2.0% to 3.4% and 3.0% respectively. The current analyst consensus is 2.7% and 2.5%. Shares gained 93 cents to a new high.

Shares of Sprint (S) rose slightly after news broke that T-Mobile's (TMUS) parent company, Deutsche Telekom AG, is preparing a merger offer. Germany's Handelsblatt is reporting Deutsche would present an all-stock offer. This would be beneficial for T-Mobile because they could benefit from the broader network without spending billions building it. Moody's said it would cost T-Mobile up to $3 billion to expand their network. Moody's said a merger would result in a "dramatic increase in scale" and the combined companies could compete aggressively on price. Sprint is majority owned by Softbank.

Nvidia (NVDA) was upgraded by Pacific Crest to sector weight. The analyst said he missed the big rally because he was not a believer in the strength of the graphic card cycle. After meeting with some graphic card producers last week he realized there was a long path ahead. They said inventories had been depleted because of strong demand. Bitcoin miners need the top of the line video cards and GPU processors made by Nvidia because of the thousand of cores that can run individually. These cards and GPUs are in some cases hundreds of times faster than the chips in a normal computer. With "crypto currencies" surging to new highs there is a race to build mining computers to create these various currencies. The analyst said customers are double ordering components for these cards to make sure they have extras on hand. There is a real fear they will run out of inventory completely and have nothing to sell. This is a boom for Nvidia.

Lightspeed's Jeremy Liew said Bitcoin could rise to $500,000 because the maximum number of Bitcoins ever will be 21 million. As demand rises, so will the price. Demand is rising sharply as investors move to a nontraceable currency in order to avoid governments, taxes, confiscation, etc. Millionaires in China and elsewhere are turning to Bitcoin as a way to hide cash where it can be untraceable and used universally all around the planet.



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The Dow Transports could be telegraphing market weakness ahead. The index has come to a dead stop at resistance at 9,500 multiple times over the last 9 months. In theory, they should have been up today because of the sharp drop in crude prices. According to Dow Theory, they are the counterbalance to the Dow. Any Dow rally should be accompanied with a rally in the transports. Any decline in the transports suggests the Dow will follow.

We have some a long way since Dow Theory was developed decades ago and the transport sector is not as big a factor as it once was. However, proponents of Dow Theory will see this decline as a warnings nonetheless.

The S&P gave back 16 points to close below prior resistance at 2,440. The index did not erase the gains from Monday but it came close. The resistance at 2,450 was broken at the close on Monday by 3 points but the selling was immediate today and worsened as the day progressed. The index closed at its lows. Arthur Cashin said there was $500 million in sell on close orders on the NYSE.

Support remains 2,420 and it is entirely possible we could see a retest of that level.

The market is like a 2-year-old child. It cannot be left alone or it will find some trouble. There were no material headlines for the market to worry about this week and no wall of worry to climb. When there is no target and no catalysts, the market tends to wander rather than rise.

Volume was elevated at 7.1 billion shares. Decliners far outweighed advancers 5,216 to 1,933. That is the most decliners since the May 17th market crash when the ratio was 5,885 to 1,389. The selling was broad but it was not harsh. Individual stock declines were minimal. Because of the Russell rebalance, Monday's volume of 6.2 billion shares could be the low for the week.

The Dow gave back 62 points compared to the 144-point gain on Monday. The gap up on short covering on Monday will have to be filled. That target will be 21,384 and about 80 points lower than today's close. The faster the gap is filled the more painless it will be.

Support is back at 21,300 and assuming there are no disasters in the headlines, it should hold through the July 4th holiday. Once past the holiday the market tends to weaken. August and September are the worst months of the year and portfolio managers will begin raising cash in July to take advantage of any buying opportunities in Q3.

The 21,525 high from the last two days will be resistance for future rallies. I was surprised the round number resistance at 21,500 was so easily broken but Monday's gains were driven by short covering rather than an urge to buy stocks.

The only Dow stocks that moved more than $1 were GS, HD, AAPL and DIS and all were to the downside. They accounted for 34 points of the Dow's 62 point loss.

The Nasdaq rebounded to resistance at 6,245 on Monday and came to a dead stop. That level was not even touched today with selling starting at the open. The big cap tech stocks were mostly lower but bot by large amounts. As I said earlier, the selling was broad but it was not harsh.

Support is well below at 6,100 and that better be a hard stop on any decline. Any move below that level could trigger another wave of selling like we saw on the 9th.

The Russell gave back 15 points to close just over prior support at 1,400. The Russell is likely to be under pressure for the rest of the week but positive the next week. I do not think the Russell movement is going to be relative to the market until after the rebalance. Investors know why it is going to be weak.

S&P futures are weak tonight at -3.50 with no apparent reason. The market does not need a reason to decline but humans try to assign an excuse to every market blip. Other than the Russell there is nothing else on the calendar this week to provide direction. Beware a calm market with no headlines.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Small Cap Weakness Ahead

by Jim Brown

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Editor's Note

The Russell rebalance on Friday should translate into small capo weakness the rest of the week. I found nothing on my scans today that was screaming to be bought. The potential for weakness in the small caps ahead of Friday is a problem for new entries. There is no reason to add a position just because it is a newsletter day. We need to wait until there is a trend or at least until a trending stock appears.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Rebalance Starting Early?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell lost 15 points or -1.06% with the largest decline of any of the major indexes. While there were multiple reasons including an implosion in energy stocks this could be the leading edges of Russell rebalance selling that was expected to weigh on the index over the next three days. The rebalance is at Friday's close.

The Dow gave back less than half its Monday gains but the Nasdaq was a weaker link with a 51 point drop. The big cap techs stocks were weak and the overall market weakness was wide spread. The individual stock losses were mostly light but the selling was broad. This could be just simple profit taking or it could be the start of a longer bout of weakness.

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

LXRX - Lexicon Pharmaceutical
The long position was entered at the open.

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BULLISH Play Updates

KTOS - Kratos Defense - Company Profile


No specific news. Minor gain with drones the hit in the Paris air show this week.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.

LXRX - Lexicom Pharmaceuticals - Company Profile


No specific news. Intraday spike over resistance but selling at the close brought shares back down.

Original Trade Description: June 19th.

Lexicon Pharmaceuticals, Inc., a biopharmaceutical company, focuses on the development and commercialization of pharmaceutical products for the treatment of human diseases. The company offers XERMELO, an orally-delivered small molecule drug candidate for the treatment of carcinoid syndrome diarrhea in combination with SSA therapy in adults. Its orally-delivered small molecule drug candidates under development comprise Sotagliflozin that is in Phase 3 clinical trials for use in the treatment of type 1 and type 2 diabetes; LX2761, which is in Phase 1 development for use in the treatment of diabetes; and LX9211 for use as a treatment for neuropathic pain. The company has license and collaboration agreements with Sanofi; Ipsen Pharma SAS; Bristol-Myers Squibb Company; and Genentech, Inc. Company description from FinViz.com.

Lexicon reported a loss of 31 cents that easily beat estimates for a loss of 44 cents. Revenue of $18.3 million beat estimates for $14.8 million. Small developmental drug companies rarely have earnings until their drugs reach the market.

Estimates earnings August 1st.

Lexicon recently reported positive results for two pivotal studies of the diabetes drug sotagliflozin. The Tandem1 and Tandem2 studies showed significant reduction in A1C and a lower rate of ketoacidosos than patients on insulin pumps. A new oral diabetes drug would be in high demand.

In Q1 they received approval for marketing for Xermelo a drug for carcinoid syndrome diarrhea. Patients were receiving the drug within days of the approval.

Shares closed at a 7 month high on Monday and just over resistance. This company could be ready for a breakout.

Options have very wide spreads so there will not be an option recommendation.

Position 6/2017:

Long LXRX shares @ $17.00, see portfolio graphic for stop loss.

MYGN - Myriad Genetics - Company Profile


No specific news. Shares posted a nice 2.4% gain to a new 11-month high.

Original Trade Description: June 17th.

Myriad Genetics, Inc., a personalized medicine company, focuses on the development and marketing of predictive, personalized, and prognostic medicine tests worldwide. It operates through two segments, Diagnostics and Other. The Diagnostics segment primarily provides testing and collaborative development of testing that is designed to assess an individual's risk for developing disease; identify a patient's likelihood of responding to drug therapy; guide a patient's dosing to ensure optimal treatment; and assess a patient's risk of disease progression and disease recurrence. The Other segment provides testing products and services to the pharmaceutical, biotechnology, and medical research industries; and research and development, and clinical services for patients. Its molecular diagnostic DNA sequencing tests include myRisk Hereditary cancer, a test for hereditary cancers; BRACAnalysis and BART, which are tests for hereditary breast and ovarian cancers; BRACAnalysis CDx test for use in identifying ovarian cancer patients with suspected deleterious germline; and Tumor BRACAnalysis CDx test that is used to predict DNA damaging agents, such as platinum based chemotherapy agents and poly ADP ribose inhibitors. The company also provides COLARIS test for colorectal and uterine cancers; COLARIS AP test for colorectal cancer; Vectra DA protein detection test for assessing the disease activity of rheumatoid arthritis; Prolaris, a RNA expression test for prostate cancer; EndoPredict RNA expression test for breast cancer; myPath Melanoma RNA expression test for diagnosing melanoma; myChoice homologous recombination deficiency (HRD) test to measure three modes of HRD; and myPlan lung cancer, an RNA expression test for lung cancer. Myriad Genetics, Inc. has collaboration with AstraZeneca for the development of an indication for BRACAnalysis CDx. Company description from FinViz.com.

In early June Myriad announced that EndoPredict, the novel new breast cancer test, had been approved for reimbursement by nearly all the medical plans in the USA. As of July 1st, public plans representing more than 35 million covered lives will join the private plans representing more than 109 million covered lives will have positive coverage of EndoPredict.

Medicare and Medicaid have posted a positive draft local coverage determination (LCD) for EndoPredict. If this LCD is approved as expected it would bring plan coverage to more than 75% of breast cancer patients in the USA. The ramp to coverage has been extremely fast as a result of the positive test results that showed EndoPredict "markedly outperformed prior generations of accepted tests" for breast cancer diagnosis.

Myriad has other breast cancer tests in the pipeline and in late stage trials. The company is rapidly becoming a powerhouse in the breast cancer field.

Earnings are already starting to rise as a result. In the Q1 update, they reported earnings of 27 cents that beat estimates for 24 cents. Revenue of $196.9 million beat estimates for $188.9 million. They guided for the current quarter to earnings of 26-28 cents and revenue of $192-$194 million. For the full year, they guided for $1.01-$1.03 and revenue of $763-$765 million.

Estimates earnings August 1st.

Position 6/19/17:

Long MYGN shares @ $24.03, see portfolio graphic for stop loss.
Alternate position: Long Aug $25 call @ $1.20, see portfolio graphic for stop loss.

WTW - Weight Watchers - Company Profile


No specific news. Big 2.6% gain to another new high. Tightening the stop loss again.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.

YRCW - YRC Worldwide - Company Profile


No specific news. Shares are only 20 cents above our stop loss.

Original Trade Description: June 13th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

For the 4th time in 7 years, Walmart selected YRC Freight as the National LTL Carrier of the Year. YRCW delivers to Walmart stores, Sams Club facilities and distribution centers all across North America. Walmart said the extensive YRCW network offers significant coverage to Walmart and their suppliers.

The company reported a loss of 70 cents for Q1 compared to estimates for 27 cents. Revenue of $1.17 billion did beat estimates for $1.14 billion. Shares imploded on the earnings miss and fell from $10.69 to $7.36.

Next estimates earnings August 3rd.

The company announced a restructuring plan to reduce management headcount and "de-layer" operational overhead. They announced several initiatives to reduce costs.

Last week they released metrics for the last two months. In April, freight tonnage per day rose 6.2% with May tonnage rising 3.3% over year ago levels. Regional tonnage increased 1.4% in April and 5.5% in May.

The business is growing and a reduction in costs will be positive. Investors seem to like the news with a rebound to pre-earnings levels. Resistance is $11.25 and a breakout there could easily run to $14.00 if the story and the market remains positive.

Position 6/14/17:

Long YRCW shares @ 10.70, see portfolio graphic for stop loss.
Alternate position: Long July $11 call @ 55 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

FOSL - Fossil Group - Company Profile


Buckingham Research upgraded from sell to neutral. The upgrade said the negatives were declining but there was very little to be positive about.

Original Trade Description: May 25th.

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.

Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.

Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.

Earnings August 8th.

Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.

Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.

Update 6/13/17: Shares crashed on news the CEO sold 520,000 shares last week and 1.074 million shares on May 30th. A Macquarie research note also said that 3.8 million shares were pledged as security for a note of around $75 million and they could be sold at any time. With FOSL shares at $11 the pledge was already in the red by $30 million. At today's close at $10 that value dropped by another $3.8 million. The CEO only has 4.426 million shares after his sales last week and with 3.8 million pledged, that leaves him with roughly 600,000. It appears the CEO is bailing on his holdings and that is never good for the stock price. If the price declines further he may be forced to sell his remaining 600,000 shares to make up the shortfall on the pledged shares. Shares are now at 16-yr lows.

Position 5/26/17:

Short FOSL shares @ $11.78, see portfolio graphic for stop loss.

Alternate position:
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.

SNAP - Snap Inc - Company Profile


We exited the position at the open after Time Warner committed to give Snap $100 million for future content positioning. This morning Facebook announced that Instagram stories had reached 250 million daily active users compared to Snap's 160 million for a similar function. That knocked SNAP for a 57 cent loss but we had already exited the position.

Original Trade Description: June 10th.

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

Snap went public on March 2nd, the day after the prior market highs. Excitement was high and the stock spiked to $29.44 the day after the IPO. Since then, Snap's optimistic future has dimmed considerably. Facebook copied almost every Snap feature in an effort to keep members from straying out of the Facebook fold. It was outright war and Snap lost.

They reported their first earnings as a public company on May 10th and missed estimates and provided weak guidance. Shares fell from $23 to $18. After a couple days of dead cat bounce rebound, they returned to $22 but that is when the trouble began. Nearly every day an analyst would cut their price target and rating.

Estimated earnings August 9th.

Citigroup, a previous backer of SnapChat (SNAP) has had a change of heart. On Friday, Citi downgraded the company from buy to neutral saying they are not sure when SNAP will turn profitable. They downgraded the 2018 earnings estimate from a loss of 42 cents to a loss of 46 cents. Citi said monetization was slower than previously expected because of a slower than expected rollout of new channels and opportunities. "Given issues with Android, summer seasonality, heightened competition and the nature of Snap's social network, we expect user growth to remain modest near term."

Nearly 70% of analysts have something other than a buy rating on SNAP.

The company is also facing a large lockup expiration in August. Currently SNAP has 404 million shares available to trade and on July 29th another 663 million Class A shares will be unlocked along with 281.1 million Class B shares and 215.9 million Class C shares. Those convert to Class A shares if the holders decide to sell them. Snap recently tried to get existing insider shareholders to commit to a one-year holding period but were unsuccessful. That suggests many are planning to dump shares when the lockup expires.

I am recommending a short on SNAP but I am not recommending an option. The August put premiums are too expensive.

Position 6/12/17:

Closed 6/20/17: Short SNAP shares @ $18.05, exit $17.82, +.23 gain.

SNCR - Synchronos Technologies - Company Profile


No specific news. New 17-yr low close.

Original Trade Description: June 1st.

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.

The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.

On May 8th the company announced it was rescheduling the earnings date for May 15th.

On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.

This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.

On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.

Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.

If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.

This has to be a stock only play because the options are too expensive.

Update 6/14/17: The company disclosed in a SEC filing that the audit committee had informed the board that financial statements for 2015 and 2016 would have to be restated. May earnings have already been postponed and the restatement could take months. Support broke and today was a 17 year closing low.

Position 6/2/17:

Short SNCR shares @ $12.64, see portfolio graphic for stop loss.

SYNT - Syntel Inc - Company Profile


No specific news. Shares closed below support at an 8 year low.

Original Trade Description: June 7th.

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel has been around for a long time but there is far more competition today than just a decade ago. Cloud sourcing has overtaken outsourcing. Companies do not need to maintain their own server farms and services like SalesForce.com and Automatic Data can handle all the service issues of running a business.

Syntel reported earnings of 46 cents and analysts were expecting 44 cents. Those estimates had dropped from 51 cents over the prior four weeks. Revenue of $225.9 million beat estimates for $225.1 million.

The company guided for the full year for earnings of $1.57 to $1.77. Analysts were expecting $2.32 but had revised their estimates lower over the prior 4 weeks to $1.90. Syntel still missed the lowered targets.

Estimated earnings July 20th.

Shares are sinking fast and are very close to a new 7-year low at $16.35. There is very little buying activity.

Position 6/8/17:

Short SYNT shares @ $16.65, see portfolio graphic for stop loss.

Alternate position: Long August $15 put @ .43, no stop loss.

VXX - Volatility Index Futures - ETF Description


Minor rebound from the record low close.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

Original Trade Description: April 12th.

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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

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