Option Investor

Daily Newsletter, Saturday, 7/1/2017

Table of Contents

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

Market Wrap

Storm Clouds Forming

by Jim Brown

Click here to email Jim Brown

It may be a sunny holiday this weekend but thunderstorm clouds are forming over the markets.

Weekly Statistics

Friday Statistics

Last week definitely did not turn out as I and other analysts expected. The end of quarter window dressing turned into a strip job instead as portfolio managers took profits in prior high flyers. The charts for the major indexes have turned bearish. Janet Yellen's comments earlier in the week that stocks were "rich" compared to normal valuations may have been the spark that triggered some selling. This is not quite the equivalent of the "irrational exuberance" comment from Greenspan that tanked the market but whenever a Fed head talks about an overvalued market, there is a reaction. You may remember her prior comments about small caps being overvalued.

In her congressional testimony in July 2014, she said valuations on small cap tech companies appear "substantially stretched" and the Russell 2000 fell 30 points in two days with the biotech index falling -114 points. The biotech index bottomed at 2,650 after her remarks and it is 3,859 today. The Russell 2000 was 1,130 and it is 1,415 today. Despite her comments rocking the market in 2014, they recovered to move significantly higher.

The bigger problem is that the Fed head thinks it is necessary to talk down the stock market. That thinking can bleed over into market sentiment and depress the investment outlook. Yellen will get another chance to take a shot at the market on Tuesday July 12th when she gives congressional testimony on the U.S. economy.

Whether it was Yellen taking a shot at valuations or the voices of multiple high profile analysts and investors over the last couple weeks, the damage was done. The Nasdaq has tested support at 6,100 three times and it closed at a five-week low on Friday.

The economic reports on Friday were neutral for the market with the exception of the PCE Deflator. That is the Fed's preferred indicator of inflation. The PCE declined -0.1% in May from a +0.2% rise in April. If you total the last four months you get zero inflation because each minor rise was erased by a similar decline. The Fed wants to see 2% inflation in order to support their rate hike commentary. With inflation either flat or fading that means the Fed "should" not move as fast on their rate hikes.

Food prices rose +0.1% in June but energy goods and services declined 3.0%. Durable goods prices declined -0.2%, non-durable goods -0.8% and gasoline and petroleum prices -5.9%. Housing rose +0.3% and healthcare +0.1%.

On a trailing 12-month basis, the PCE is up 1.4% and the core PCE is also up 1.4%. Those numbers compare to the peak in February at 2.1% and 1.8% respectively. The Fed will continue to say the low inflation is related to transitory issues. Previously they referenced the Phillips Curve and the relationship between high employment and low inflation. Strangely, with inflation fading, the Fed said it was considering raising its inflation target above 2% even though they have not been able to reach that target since the financial crisis.

Personal income rose 0.4% in May and the biggest gain in three months. However, the gain came from intangibles for most people because income from wages and salaries only rose +0.1%. The rest was attributed to "asset growth" and rental income. Exactly how many blue-collar workers are receiving stock appreciation, dividends and rental income?

Personal spending rose only 0.1% for May after a 0.2% hike in April and a whopping +0.6% spike in March. Spending rose 1.3% on durable goods like TVs, 0.2% on nondurable goods, 0.7% on apparel and 1.2% on gasoline. Spending declined -0.8% on motor vehicles and parts, household furnishings -0.1% and recreational goods and vehicles -0.1%. The slowing in spending does not match the rise in personal income. Since Americans always spend more than they make, these numbers are questionable.

The consumer sentiment for June declined from 97.1 to 95.1 and the lowest level since November. The biggest hit came from a drop in expectations from 87.7 to 83.9 and the lowest level since October. The present conditions rose from 111.7 to 112.5. Only 32% of business respondents expect economic conditions to improve over the rest of 2017. That is down from 40% in May.

The calendar for next week is busy despite the holiday. The FOMC minutes will be released on Wednesday afternoon and as always analysts will be looking for clues about future Fed moves. This is the week for the jobs numbers and the ADP Employment has been pushed out a day until Thursday. The expectations are for a gain of 178,000 jobs compared to 253,000 in May. The ADP report has been surprising to the upside recently.

The Nonfarm Payrolls are Friday and expected to show a gain of 180,000 jobs compared to the 138,000 in May. The nonfarm report has been surprising to the downside recently. I tend to believe the ADP numbers because they are taken from real time employer additions to the ADP processing system rather than phone interviews with random people in the nonfarm report.

The auto sales data on Monday could be another piece of the puzzle for economic direction. There is a constant rumor of peaking auto sales and another decline could boost recession worries.

Yellen's testimony to congress on the following Tuesday will be important because it is really a testimony on the state of the economy followed by a couple hours of questions.

The Q2 earnings cycle begins the following week and this week is severely lacking of any reports. The only material earnings are YUM China, Herman Miller and PriceSmart on Wednesday after the close.

ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume should only be a trickle. We will resume normal publication on Wednesday July 5th. Thank you in advance for your understanding.

The final Q1 GDP report on Thursday rose unexpectedly to 1.42% growth from 1.15% in the earlier revision. The next official GDP will be on July 28th and the first reading for Q2. The Atlanta Fed real time GDPNow forecast for Q2 is now predicting 2.7% growth, down from 4.3% in the first forecast for Q2. I am expecting it to level out around 2.5% over the next month. In Q2-2016 we saw 1.4% growth followed by 3.5% in Q3. If we can avoid breaking under 2% for Q2 that would give us a higher base for Q3 this year.

Mario Draghi said deflation was dead and inflation rising and the ECB could now adjust its policies. Interest rates were immediately adjusted by investors. The ten-year was trading at 2.12% on Tuesday and the rate spiked to 2.3% in the selloff. The dollar crashed to a nine-month low on those same comments and the strength in the European economies.

Last weekend I said I doubted if Nike (NKE) earnings would be enough to move the Dow because they would have to post a 10% gain to really contribute. Well, they reported earnings and a deal with Amazon and shares rallied 11% or $5.83 to add 40 points to the Dow.

The company reported earnings of 60 cents compared to estimates for 50 cents. Revenue of $8.7 billion also beat estimates for $8.6 billion. Much of their earnings beat was due to an unexpectedly low tax rate but nobody seemed to care. However, sales in Western Europe rose 12% to $1.56 billion and sales in China rose 16% to $1.09 billion.

As expected, they announced a pilot program with Amazon to sell a "limited" assortment of shoes and apparel on Amazon. Nike already has a robust online webstore and they have avoided selling on Amazon to avoid competition with their distributors. They also said they had deals in place with Alibaba and European e-commerce site Zalando.

Micron Technology (MU) reported earnings of $1.62 compared to estimates for $1.51. Revenue rose 92% to $5.57 billion. CEO Sanjay Mehrotra said, "Our results reflect solid execution of our cost-reduction plans and ongoing favorable industry supply-and-demand dynamics." They guided for the current quarter for earnings $1.80 on revenue of $5.9 billion at the midpoint. Analysts were expecting $1.57 and $5.62 billion. The company ended the quarter with $4.9 billion in cash.

Micron said DRAM prices rose 14% during the quarter. That is after similar gains in the prior two quarters as well. Memory is in tight supply and prices are rising sharply. Hewlett Packard warned that margins would shrink because of rising memory prices.

After a post earnings spike in afterhours on Thursday the stock fell 5% on Friday. With revenue up 92% and a beat on earnings and guidance you would have expected a blowout gain. However, Micron shares were up 200% since May 2016 so there was a lot of expectation already built in. This is definitely a buy the dip story.

American Outdoor Brands (AOBC), formerly Smith & Wesson, reported earnings of 57 cents compared to estimates for 38 cents. Revenue of $229.2 million beat estimates for $209.5 million. They guided for the current quarter for earnings of 7-12 cents and revenue of $140-$150 million. They guided for the full year for $1.16-$1.36 compared to the $2.25 earned in 2016. Shares were hammered for a 7.5% decline.

The problem for AOBC and Ruger (RGR) and Vista Outdoor (VSTA) is Trump. The current president is very pro gun while President Obama was very antigun. He tried to ban guns and ammo in various ways dozens of times in his 8 years as president. He was the best salesman the firearms sector could have wanted. President Trump is no danger to firearms owners so there is no rush to buy additional guns. Firearms owners have relaxed after 8 years of stress. Federal Premium, a maker of handgun, shotgun and rifle ammo, has been laying off workers since January. They have cut 186 workers in the Minnesota plant to reduce the workforce to 1,246. They said inventory levels have been high since the election and they are waiting on levels to be reduced before resuming full production.

Vista reported a 5% decline in ammo sales this quarter and 11.5% in the prior quarter. As an example, 9mm pistol ammo by various manufacturers can now be bought anywhere online for $160 per case of 20 boxes, compared to $240-$260 a year ago if you could find it. That is a perfect example of supply and demand.

Hain Celestial (HAIN) said activist hedge fund Engaged Capital had accumulated a 9.9% stake and is pushing the company to sell itself. The fund has nominated 7 candidates for the 8 person board. Engaged just won a similar battle with Rent a Center (RCII). Since Hain is still run by its founder, this would be a tough fight. They have already announced a 20% cut in stock keeping units (SKUs) and unveiled the biggest cost savings program of any U.S. food company. Shares spiked 8.5% on the news.

Have you gotten any sweet heart deals lately? If not then your name is probably not Warren Buffett. Back in 2011 when Bank of America stock was trading at just over $5, Buffett bought $5 billion in preferred stock and warrants that allowed him to convert that to common stock if BAC did well in the future. The price of the warrants is $7.14. When BAC announced the dividend increase on Thursday that triggered the option for Buffett to exercise the warrants. He will trade his $5 billion in preferred shares and warrants for 700 million common shares at $7.14 each. Shares are trading for just over $24 today. That gives Buffett an instant paper profit of $12 billion and he will begin collecting $336 million a year in dividends. Buffett will become the banks largest shareholder with a 7% stake.

Buffett also owns 17% of American Express, 9.6% of Wells Fargo, 9.4% of Coke, 26% of Kraft Heinz, 9.3% of United Airlines, 7.5% of Delta and large stakes in 86 other U.S. corporations. It is good to be Buffett.

Bank of America (BAC) said it would raise its quarterly dividend by 60% to 12 cents beginning in Q3 and repurchase $12 billion in stock over the next 12 months. Since BAC has 9.95 billion outstanding shares, the combination of dividend increase and share repurchases will return almost $17 billion to shareholders over the next four quarters.

Tesla's CEO Elon Musk is at it again. He teased on Friday that Tesla would have big news on Sunday. Musk was being heckled by people on Twitter to confirm a production date on the Model 3. Production is supposed to start in July. Musk tweeted back, "News on Sunday" without saying what the news would be. In theory, Tesla is supposed to begin deliveries in July and quickly ramp up production to 5,000 units a month in 2017 and 10,000 a week in 2018. Tesla has more than 400,000 deposits on preorders for the car. About all we know about the Model 3 is that it will start about $35,000 and travel at least 215 miles on a charge. There will be very few options other than battery size. The Model 3 online configurator has not yet been released. Tesla is also expected to give delivery numbers for the Model S and X next week. Total production is expected to be more than 50,000 units for the first six months and put them on track for well over 100,000 units in 2017. They produced about 76,000 cars in 2016. Musk has said the gigafactory is targeting enough batteries for 500,000 vehicles in 2018.

The next six months will be huge for Tesla because the solar shingles will begin delivering in late July and there is a huge backlog for those as well. The battery wall business will also kick into high gear as the gigafactory shifts into high production of those battery units.

Tesla shares have doubled in price since December.

E*Trade (ETFC) may be for sale. The board has given an ultimatum to its CEO. Clearly define the company's future by the end of 2018 or face a possible sale. The board wants the CEO, Karl Roessner, to revitalize E*Trade's core brokerage business and trigger a revival that has eluded the six prior CEOs that failed in the same task. E*Trade is 35 years old and just embarked on a new advertising campaign to appeal to new and old investors alike. E*Trade charged $6.95 commission per trade and Charles Schwab and Fidelity charge $4.95. Interactive Broker's charges $5 or less per 1000 shares. ($0.005 per share with a $1 minimum) E*Trade is restructuring their trading platform for about the 10th time over the last 20 years in an effort to remove the clutter and speed up the process. Time will tell if that will be enough to save Roessner's job. Some analysts think the letter from the board was an actual advertisement to anyone who might be interested in acquiring the company.

Crude prices spiked more than $3 last week in a most unlikely set of circumstances. Crude inventories rose 100,000 barrels in the EIA report on Wednesday and gasoline and distillate inventories barely declined. The lack of demand is very annoying for energy investors. Refinery utilization dropped from 94.0% to 92.5% for the week ahead of the July 4th driving weekend. U.S. production declined 100,000 bpd to 9.25 million bpd. There was an easy answer to this unlikely series of events. Tropical storm Cindy cut production in the Gulf and put all the facilities on storm watch and reduced run rates. Add that to field maintenance in Alaska and you have your production decline.

Since most energy traders do not really understand the mechanics behind the process, they saw the drop in production and thought that was a sign to go long. On Friday, Baker Hughes said active oil rigs actually declined by 2 for the week and ended the record 23 week streak of gains. That caused another spurt of knee jerk buying and crude was up $1.40 on Friday.

Nothing has materially changed over the last week except for the decline in rigs. However, we are entering a holiday period and producers tend not to add rigs ahead of a holiday because workers are gone for the holiday. While the streak ended, the 2 rig decline is not material and a new streak should begin over the next two weeks.



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The markets have had a good year already. The Dow has risen 8.0%, Nasdaq 14.1% and S&P-500 8.2%. The Russell 2000 is up 4.3% but it was up 21% right after the election, so the sideways motion in 2017 has been just holding those gains. Typically, when the year starts strong, especially for tech stocks, it finishes strong. That does not mean there will not be a summer correction first. August and September are the two worst months of the year for the markets.

The equity markets have suddenly caught a bad case of the volatility virus. After four weeks of relatively calm market gains to close at a new high on June 19th, the indexes have found themselves in a stormy sea. Triple digit advances and declines have cleared stop losses in both directions and volume has been very high. Thursday's volume was over 7.86 billion shares and well over the 5.0 billion expected. Friday saw 6.5 billion and this was a holiday Friday before a long weekend. This was amazing volume in what should have been a dull market.

The big cap tech stocks have lost their momentum and have fallen out of favor with investors. Whether this is related to the Yellen comments or not, is unknown. It may be just the end of the run for the FAANG stocks or just a much needed bout of profit taking. Either way it has had a dramatic impact on the markets. The Nasdaq was down -100 points again on Thursday.

The Nasdaq Composite tacked on another triple digit decline over four days of -216 points from high to low. These are getting to be really annoying. The index closed at a five-week low although there have been multiple intraday dips below our closing level. The support at 6,100 has now become critical and next week could determine our market direction for July. The Nasdaq chart is bearish and a close below 6,100 would be a very bearish signal.

The S&P is right on the edge of disaster if support at 2,420 fails. The intraday dip on Thursday cleared the sell stops but the weak rebound managed to close over support on Friday. That is a critical level. The rally remains intact as long as we rebound from here. A break below 2,420 could move significantly lower.

The Dow traded above and below initial support at 21,400 multiple times last week only to close at 21,439 on Friday. That initial support has failed. The Dow is struggling to regain its highs and there are only a few negative components. There is still hope for a recovery.

If the Dow continues lower the critical levels are 21,125 followed by 20,900. The initial level was the breakout from the prior high on June 1st. The second level was support for most of May.

The Russell outperformed for the week. Support at 1,400 held and the index almost made a new high on Wednesday. This gives me a little hope that the market may not decline further next week. The Russell is being held up by the financials, which are 17% of the index weighting. Now that the dividend and buyback news is past tense, it will be interesting to see if that sector can maintain any forward momentum.

In theory, the end of quarter portfolio restructuring is over and next week will see inflows of new cash. Unfortunately, theory and historical trends did not work too well last week. We could blast off on Monday and return to test the highs but I am not counting on it. Sentiment has been damaged, money lost and investors will be more cautious before jumping back into damaged stocks. We need to see how the market performs on Monday and Wednesday before making any new assumptions.

One factor I have not discussed is the failure of the healthcare vote in the Senate. While they may come back from the holiday and pass something before the August recess, I am not holding my breath. Even if that occurs, the potential for getting a bill through the conference committee that can pass both the House and Senate is nearly impossible. Without healthcare reform, there is no tax reform and that is what is weighing on the market.

Random Thoughts

Everyone is jumping back on the fence with both bullish and bearish investors moving to neutral. Just over 70% of investors still do not believe the market is going higher. On a contrarian basis that is good because those unbelievers will be chasing prices if we do move to new highs.

Bank of America said clients were net sellers of individual stocks for the third consecutive week. Institutional clients were also net sellers over the last two weeks. Hedge funds were net buyers over the last two weeks. Clients bought mid caps for the third consecutive week and sold both large and small caps. Pension funds were net buyers of US equities for the fourth consecutive week.

The bank said cumulative flows were heavily weighted into cyclical and defensive sectors and bond proxy sectors. Funds continued to flow into ETFs with $247 billion inflows year to date.

The bank said the flows into defensive sectors suggested the market would be lower for longer. Michael Hartnett penned a piece called "Bubble, bubble, oil and trouble" warning of structural deflation with the Fed tightening into declining inflation. He warned the Fed could be forced to ease again in 2018. Source -- Source

Chart is for the prior week:

Calling all scrabble players. The market is in need of a new acronym for the big cap tech stocks. First it was FANG for Facebook, Amazon, Netflix and Google. Then FAANG appeared with the addition of Apple. Recently FAAMG has been making the rounds with Microsoft replacing Netflix. Several traders have been referencing FANG MAN with Netflix, Nvidia and Microsoft. I am issuing a challenge to our scrabble playing readers. See if you can come up with a one-word acronym for as many of the following stocks as possible. The first 5 would be required but the rest are optional. You can use an A or G for Alphabet. If I missed a fast moving tech big cap stock you can use it as well.

Required: Facebook, Apple, Amazon, Alphabet, Microsoft.

Optional: Netflix, Nvidia, Adobe, Tesla, Priceline

Send me your answers and you could get credit for a new buzzword in the market.

The Iranian city of Ahvaz with a population of 1.1 million tied the hottest reliably recorded temperature on Earth at 129.2 degrees on Thursday. That has been recorded twice before, once in Mitribah Kuwait on July 21st, 2016 and Death Valley California on June 30th, 2013. It is hard to have a reliable recording of temperatures that hot because most thermometers do not go that high. In Ahvaz the humidity was 70% making the heat index over 140 degrees. There was a higher temperature recorded in Death Valley on July 1st, 1913 but most historians believe the measurement was technically inaccurate.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."


New Plays

Take the Day Off

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market is only open a half day on Monday and volume should be half of normal. Direction will be a coin toss. The charts have turned bearish but Monday starts a new month and quarter and there could be new retirement funds coming into the market. However, it is not likely to happen on Monday. Most funds will be closed on Monday with only a skeleton crew manning the phones and computers. Wednesday will be the day the market picks a direction. I am not recommending any new positions for Monday. There is no reason to add new plays ahead of the weekend/holiday event risk.

ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume should only be a trickle. We will resume normal publication on Wednesday July 5th. Thank you in advance for your understanding.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Good Relative Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 declined less than a point on Friday and has held support at 1,400 for two weeks. The small cap stocks have been doing much better than their big cap brethren. The Russell is holding support but the Nasdaq and Dow have formed bearish patterns and should this continue the Russell will eventually follow them lower.

The Dow closed 77 points off its +140 point intraday gain and the Nasdaq fell back into negative territory. This is not normal end of June behavior.

I am not recommending any new positions until after July 4th and the weekend event risk has passed.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

No Changes

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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. Good relative strength with a minor gain in a mixed market.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Still only a minor 5 cents decline after the big spike on Wednesday. Good relative strength.

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.

Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.

Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

Position 5/30/17:

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

BEARISH Play Updates

PPC - Pilgrims Pride Corp - Company Profile


No specific news. Only a minor 10-cent gain. The bearish trend is still intact.

Original Trade Description: June 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.

I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.

Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.

PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.

Expected earnings August 2nd.

Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.

Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.

Position 6/27/17:

Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Volatility declined despite the mixed market.

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.

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.

Left Over Lottery Tickets

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

These positions are only updated on the weekend.

ECA - Encana Corporation - Company Profile


No specific news. Nice rebound for the week as oil prices shot up again.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compared to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex will be funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings July 27th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

Position 3/14/17:

Long October $11 call @ $1.40, no stop loss.

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.

NGVC - Natural Grocers Vitamin Cottage - Company Profile


No specific news. There was no follow through on the rebound from Thursday.

Original Trade Description: June 24th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of June 6, 2017, it operated 138 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

The company reported earnings of 13 cents that missed estimates for 16 cents. Revenue of $192.2 million missed estimates for $197.3 million. Same store sales declined -1.7%. They narrowed their full year guidance to earnings of 50-54 cents. They said they were cutting back on the number of new stores previously announced. That is a sure sign they are seeing competitive pressures on the business. The CEO warned that "the food retailing environment remains challenging."

The Amazon announcement just made their retailing environment significantly more challenging. NGVC has a very nice produce section of organic produce and a small grocery department roughly one fourth the size of a Whole Foods Market. Another 25% of their space is dedicated to vitamins. I visit one about once a week for a couple items. I have long ago switched my vitamin buying to Amazon because of the significantly reduced cost. I ran out of something a couple weeks ago and thought I will just swing by NGVC and get a bottle. The price was so high compared to Amazon, the sticker shock had me leaving the store empty handed. I had it from Amazon two days later.

I am afraid that is what many people are learning. It is hard to beat Amazon prices and the selection is much larger. NGVC was a niche store 10 years ago and did well. Now that Safeway, Walmart and Kroger carry so much organic food, NGVC is having trouble competing.

Expected earnings August 3rd.

NGVC shares are in free fall after their earnings. The Amazon announcement just greased the slide a little more.

Update 6/29/17: NGVC won the "Good Egg Award" at the Good Farm Animal Awards Ceremony in London. Shares spiked to $8.60 at the open to stop us out of the stock position at $8.45. The option position remains open.

Position 6/26/17:

Long August $7.50 put @ 28 cents, see portfolio graphic for stop loss.

Previously closed 6/29/17: Short NGVC shares @ $8.06, exit $8.45, -39 cent loss.

SYNT - Syntel Inc - Company Profile


No specific news. Shares are holding under resistance. The stock could go either way from here.

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:

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

Previously closed 6/23/17: Short SYNT shares @ $16.65, exit $16.60, +0.05 gain.

YRCW - YRC Worldwide - Company Profile


No specific news. Shares are trying to rebound back over prior support, which is now resistance.

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 July $11 call @ 55 cents, see portfolio graphic for stop loss.

Previously closed 6/21/17: Long YRCW shares @ 10.70, exit $9.95, -.75 loss.

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