Option Investor

Daily Newsletter, Saturday, 7/8/2017

Table of Contents

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

Market Wrap

Volatility Over?

by Jim Brown

Click here to email Jim Brown

Has the market volatility run its course or is there more to come?

Weekly Statistics

Friday Statistics

For a holiday week, we saw significant volatility. Other than Monday's 3.8 billion shares, the volume was moderate at 6.0 to 6.7 billion shares for the rest of the week. Alternating triple digit gains and losses and closes under critical support, were just a few of the market events. However, by Friday's close the Dow, Nasdaq and S&P all managed to post minor gains for the week. All are under recent resistance but rebounded to close back over support. The Nasdaq closed at a six-week low on Thursday and below support at 6,100. The S&P closed at 2,409 on Thursday and also under critical support at 2,420.

Both indexes rebounded back above support on Friday's short covering but the charts are still bearish.

The Friday short squeeze was driven by a sharp rebound in the payroll numbers for June. June posted job gains of 222,000 compared to the previously reported 138,000 in May. The May number was revised up to 152,000 and the April number was revised up from 174,000 to 207,000. Including the revisions, that was an addition of 266,000 jobs. Analysts had expected 180,000. The average monthly gain for the quarter was 194,000 jobs.

The initial reaction in the futures market was negative because wage growth rose only 0.153% and May was revised lower from 0.2% to 0.1%but once traders realized that all the other metrics were positive, a positive bias appeared.

The unemployment rate rose from 4.3% to 4.4% because 361,000 people entered the labor force. The labor force participation rate also rose from 62.7% to 62.8%.

The private sector added 187,000 jobs and government added 35,000. Retailers added 8,000 jobs much to everyone's surprise. Healthcare added 37,000 jobs, leisure and hospitality 36,000, construction 16,000, temporary help 13,000, financial services 17,000, mining and energy 8,000, professional and business services 35,000.

The payroll report did not have any material impact on Fed policy. They are on autopilot for a new hike in December. While they have not hit their 2% inflation target, they are now focused on a bubble in bonds, equities and commercial real estate values. This is a Fed that is looking for an excuse to hike rates. The Fed released its Monetary Policy Report (PDF), which forms the basis for Janet Yellen's testimony to the House and Senate next week.

Currently there is an 86.3% chance of the Fed doing nothing in September. The recent economic reports, slowing inflation growth and sharp selloff in Treasuries have moved the expectations out to December for the next hike and even then the chances are barely over 50:50. There are some analysts that believe the Fed will be forced to wait until 2018 and that may be why the Fed sudden interest in asset bubbles as a reason to hike rates.

The Atlanta Fed's real time GDPnow forecast has fallen to 2.7% growth in Q2 but there is still a month of reports to go that cover the June period. I am expecting 2.5% when the initial GDP is released at the end of July.

The calendar for next week is headlined by multiple appearances by Janet Yellen. This is the week for her testimony to the House and Senate and that always provides an opportunity for a foot in mouth event. However, she has been very good in recent interactions and not say anything that will get her in trouble. She has learned her job well and is far more careful now than in her initial months in office.

On Thr/Fri we get the two price indexes, Producer and Consumer, with their update on inflation. Everything else is just filler including the seven Fed speeches. No Fed speaker is going to say anything that will contradict Yellen's testimony this week.

The Q2 earnings cycle kicks into high gear on Friday with Citigroup, JP Morgan Chase, Wells Fargo and PNC Financial. The banks are expected to do well and several are holding near their recent highs. Wells Fargo is the laggard because of their duplicate account scandal that continues to plague them.

Thomson Reuters is predicting 7.9% earnings growth in Q2. So far, 23 S&P companies have reported and 78.3% have beaten earnings expectations compared to the long-term average of 64%. Some 84% of companies have beaten revenue estimates and well above the average of 59%. For Q2 there have been 80 negative preannouncements compared to 43 positive announcements. Only 9 S&P companies will report earnings next week. The only Dow company to report this week is JPM. There will be 9 Dow reporters the following week.

There was very little stock news on Friday but Tesla (TSLA) was at the top. On Wednesday, Goldman Sachs (GS) predicted the stock would be cut in half and reiterated a sell rating. The analyst lowered the price target to $180 but that was only $10 lower than his prior sell target. The analyst said there was potential for downside as the Model 3 launch curve misses the company's production targets. At the same time, he said the demand for the Model S and Model X appeared to be hitting a plateau below an annual run rate of 100,000 units.

On Friday, Tesla saw its national car registrations decline nearly 10% through April, with California, its largest market, falling 24% according to IHS Markit. Since the May/June numbers are not yet available we do not know if April was a fluke or the start of a new trend. Elon Musk blamed a battery shortage for missing the production targets in June with deliveries of 22,000 cars compared to the 25,000 target. Shares have crashed 16% for the week and 19% from their $387 high the prior week.

Production on the Model 3 began on Friday and the first customers will get their cars by the end of the month. Tesla said in its latest earnings release that Model 3 sales could impact demand for the Model S and X. Elon Musk is trying to avoid that by reminding consumers, "Model S will always have more range, more acceleration, more power, more passenger cargo room, more displays (two), and more customization choices."

Long time Apple analyst Gene Munster said the economics of the Model 3 would catapult Tesla's addressable market in the U.S. from 1 million vehicles a year to more than 11 million. However, they will have to double production in 2017, 2018 and again in 2019 to capitalize on that larger market. Musk expects to make 10,000 Model 3s or more per month in 2018.

Tesla also announced on Friday that it won a contract to install the largest grid scale 100-Megawatt battery in South Australia. Tesla must install the battery within 100 days of the contract signing or the batteries are free. Musk said a failure to install on time would cost Tesla $50 million or more. The battery installation is large enough to power 30,000 homes if the main power were to fail. Prior to this installation the largest battery backup in the world was an 80-Megawatt installation in California, also powered by Tesla batteries. South Australia made a commitment to shut down its coal fired generation stations and rely on wind, solar and gas. This makes the grid unstable since the sun only shines half a day and the wind is unreliable. The battery backup system is supposed to fix that problem. In September, 1.7 million residents were without power, some for up to two-weeks because the renewable systems could not keep up with demand and collapsed.

Sears Holdings (SHLD) CEO Eddie Lampert is on his way to being the worst retail CEO ever. He announced on Friday they were closing another 43 stores, 8 Sears stores and 35 Kmarts. That is in addition to the 265 store closings already announced in 2017. Shares recovered some of their intraday losses on the announcement.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Snack maker Mondelez (MDLZ) said second quarter revenue growth would be reduced by 3% as a result of the recent wave of cyber attacks. The company said locations in different regions were experiencing technical problems as a result of the attacks. In some markets, revenue was permanently lost due to timing of holiday sales but some revenue will be recovered in Q3 when delayed shipments eventually arrive. Mondelez said shipping and invoicing was delayed during the last four days of the month. Those systems are now up and running again. They also expect to incur incremental one-time costs in both Q2 and Q3 as a result of the attacks. Shares declined on the news but recovered by the close.

Canaccord Genuity analyst Mike Walkley reiterated a buy rating on Apple with a target of $180 saying iPhone sales are doing just fine. He said a recent survey showed sales were tracking for 42 million in Q2 and 47 million in Q3.

In addition, a Raymond James survey showed that 14% of iPhone owners plan on buying Apple's Home Pod when it goes on sale in December. Another 12% are planning on buying the Apple Watch and that is the highest of any prior survey. There was also strong buying interest in Apple speakers and Beats headphones.

On Thursday, Qualcomm increased its legal attack against Apple and is trying to block importation of some iPhone models into the US. Analysts believe this is just another round of legal sparring and there is no danger to Apple. This is a negotiating tactic just like Apple's suit against Qualcomm and refusal to pay $1 billion in license fees. If Qualcomm were to get close to an import block sometime in 2018, Apple would pay the fees. Most analysts believe the companies will reach a settlement in mid 2018 and all the legal battles will end.

Apple is suing Qualcomm for unfair licensing practices. Qualcomm supplies one component to the iPhone but demands a percentage of the phone's total selling price rather than a fee on just the one component. Apple says this is taxing Apple's innovation rather than just the one component. Apple says they should not have to pay Qualcomm for technology breakthroughs that do not relate to the Qualcomm component. Qualcomm contends that without their component there would be no iPhone.

McDonald's (MCD) shares rose 2% after Cleveland Research said U.S. same store sales were stronger than expected and earnings are poised to beat estimates over the next 6-12 months with Q2 comps looking "solid." The analyst was bullish on the company's execution, new products, messaging, mobile expansion and product conviction.

Stores in my neighborhood have more activity and longer lines than I remember seeing in a long time. 12-18 months ago, they were empty more than busy and it was a quiet place to take the grandkids for an ice cream and 30 min of play time. Now the place is a zoo with lines and the play land is packed out. My wife said everyone she knows is going there for the $1 drinks when everyone else averages $2.50. That loss leader for McDonalds is scoring them a lot of food orders to go with the cheap drinks. Shares spiked to a new high on the analyst comments.

Blue Apron (APRN) has already fallen 22% from its IPO price and it has only been trading for six days. This is everyone's IPO nightmare. Initially they wanted to price it in the $15-$17 range. They eventually conceded and priced it at $10 and that is exactly where it closed on the first day of trading after an intraday high at $11. Some analysts blame the poor performance on the Amazon/Whole Foods announcement just prior to the IPO. There are worries Amazon's ability to deliver products fast and Whole Foods reputation for fresh produce and meat, could allow the combination to duplicate the Blue Apron business model very quickly.

Another challenge is the lack of customer retention by Blue Apron. With more than 20 prepackaged foods companies in their market, they have only been able to retain 23% of prior customers. About 72% of customers cancel the service within the first six months. I believe this is a fad business. It looks like a good idea in the advertisements but you still have to retrieve it from the porch and cook the food. Consumers today are very active and the type of consumer this appeals to is probably the most active. About the only hope Apron has today is a mass merger with multiple other companies to reduce the competition.

The silver market declined sharply on Friday after a flash crash in the commodity at 7:PM on Thursday evening. Silver is a commodity so the futures are open at all hours. At 7:PM volume is normally somewhere between 25-50 contracts in a five-minute period. On Thursday, somebody dropped a 6,000 contract sell order on the market and prices declined 11% in just a few seconds from $16 to $14.34. Those 6,000 contracts represented about $500 million in silver. The CME reviewed the action and adjusted the sales prices of everything below $15.45 to that price. That saved many traders a lot of money as stop losses were hit during that air pocket.

There was no shortage of conspiracy theorists. Why would anyone drop a 6,000 contract sell on the market at the most illiquid time of the day? Analysts determined it was not a fat finger trade because there was no corresponding buy orders to recover from their error. Several analysts pointed to some volatility in the Japanese bond market at exactly the same time. With the Bank of Japan buying all the bonds available at the exact same time there could have been some complicated relationship of bonds, yen and silver in some account that triggered the massive sale.

Regardless of the reason, the trade killed the sentiment for silver and the commodity lost -2.6% on Friday to close almost exactly on that CME price adjustment.

Oil prices had an eventful week. Prices rallied to just over $47 on Monday and then crashed back to $45 on Wednesday. Both the API and EIA reported large declines in inventories of -5.76 MB and -6.3 MB respectively. Cushing inventories fell to a multi-month low and product demand rose to a record 22.23 million barrels thanks to July 4th holiday driving. Prices should have risen. However, US production rose 88,000 bpd and the biggest weekly increase this year.

OPEC said it was mulling production caps on Libya and Nigeria. Prices rallied. Russia and Kazakhstan said they would reject future production cuts proposed by OPEC. Kazakhstan just started the 370,000 bpd Kashagan field that will add to the glut. Russia is starving for cash so their compliance with the 300,000 bpd cut they initially agreed to is very low at this point and will probably be nonexistent in the near future. Prices declined.

Once the summer demand cycle is over and that is about six-weeks from now, the outlook for oil prices will fade. Once a few countries begin dropping compliance with the OPEC cuts, there could be a rush to market by everyone else.

In the Non-OPEC cuts, Russia and Mexico were the only main players. If Russia drops compliance completely, you can bet the rest will be heading to the exits.

Bloomberg Chart

Now that the holiday is over the activation of rigs resumed with 7 new oil rigs and 5 new gas rigs. The one-week decline was holiday related as I wrote last week.



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Dip buyers have had a tough year because there have not been any material dips. According to JP Morgan, the 3% intra-year decline has been the smallest since 1980 and in a tie with 1995. The long-term average is a 14.1% decline every year. While we have seen some increased volatility in recent weeks, it pales in relation to "normal" volatility. This makes the markets hard to predict because there are no normal peaks and valleys. Every 5-10 day move higher is met with expectations for a decent correction but instead the indexes move sideways with maybe a day or two of declines then additional sideways consolidation. Eventually, there will be a real correction and it will be very painful. In the Random Thoughts below, I have comments from Bank of America on the coming "Humpty-Dumpty" crash. This is just their opinion, not a guarantee of a future event.

The S&P closed well under critical support at 2,420 on Thursday but the minor bout of short covering on Friday lifted it back over that level. The pattern is still bearish with multiple resistance levels that need to be broken before it will turn bullish again.

The Dow continues to chop around just below its recent highs and prior support at 21,414. The intraday dip to 21,200 was brief as was the spike to 21,562. There is tremendous indecision and the Dow has been posting alternating gains and losses for a couple weeks now. The Dow chart has retained its bullish bias but it is looking "toppy" because of all the volatility. That is a symptom of tops and bottoms. Only one Dow component reporting this week and that is JPM on Friday.

Supporting the Dow is the Dow Transports. The index closed at a new high on Friday and the Dow Industrials are not likely to decline as long as the transports are positive. The breakout is being powered by the airlines, railroads and low oil prices

The Nasdaq Composite closed under critical support at 6,100 on Thursday but the Friday short squeeze lifted it back into the recent congestion. There are multiple levels of resistance that would have to be broken for the chart to turn bullish again. Despite Friday's rebound, the chart is still bearish until proven otherwise. At Thursday's lows, the index was down -222 points from the 6,303 lower high on June 26th. The pattern of lower highs and lower lows needs to be broken to repair sentiment.

The small caps are outperforming the big caps for a change with the Russell 2000 only about 12 points from a new high. Resistance at 1,427 is strong as is support at 1,400. The strength in the financials is supporting the Russell.

Last week was full of external events to push the markets around. We had the low holiday volume and strong inflows of end of quarter retirement money hitting the market. Funds were repositioning for the coming earnings cycle and the two weakest months of the year in August/September. The earnings cycle begins this week with the big banks reporting on Friday. Funds should be positioned to capture any earnings gains. The holiday volatility should be over but the Yellen speech/testimony is always a hurdle. As long as the Nasdaq is over 6,100 and the S&P over 2,420 I would be in buy the dip mode. If we have new closes under those levels I would move to flat or short.

Random Thoughts

Very little movement in the sentiment survey last week. 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's Michael Hartnett said last week that "central banks have exacerbated inequality via Wall St inflation and Main St deflation" and now they are looking for a way to painlessly undo their error. He said, "There are only two ways to fix inequality. You can make the poor richer or you can make the rich poorer." He believes the "Fed/ECB are now tightening to make Wall St poorer" because it is "no longer politically acceptable to stoke the Wall St bubble."

One year ago, the 30-year Treasury yield hit an all time low o 2.14%. The Swiss government could have issued a 50-year bond at a negative yield. Over the last year, yields have improved slightly but the global equity markets have gained $10 trillion to $76.3 trillion. Global debt has risen $50 trillion to $217 trillion since the financial crisis. Unfortunately, nearly one-third of the global government debt is held by central banks. They need to unwind this massive stimulus but inflation is not cooperating.

They have begun tightening in the case of the Fed and talking about tightening in the case of the ECB but rates are not rising materially. Beware the next taper tantrum. The Fed has already warned they are going to begin tapering their ongoing QE purchases. In the past, the tapering process did not go well. Without rising inflation, it may not go well this time either unless they proceed very slowly.

Hartnett believes the Fed's various operations to hike rates in a zero inflation economy will not go over well in the equity market. He is expecting a "Humpty-Dumpty" fall in the market over the next six months, most likely in September/October. He is expecting a global financial event as a result of the Fed/ECB trying to raise rates using the equity market valuations as an excuse.

Hartnett received a significant amount of criticism for this call but there are other believers in this scenario.

Ray Dalio from Bridgewater, warned the Fed QE party is ending. The days of easy money are over. "Investors should keep on dancing but move closer to the exits."

Here is a reason Sears is having so much trouble maintaining positive retail growth. The malls are dying. There is even a website called DeadMalls.com that has a running commentary on the various dying malls around the country. The malls are turning into ghost towns and you cannot sell any products if there are no customers. This is affecting the real estate value of Sears properties as well.

The Yellowstone super volcano is making noise. Over the last two weeks, there have been over 1,100 earthquakes in and around the Yellowstone caldera. Quakes are spreading out from Yellowstone and there was a 5.8 earthquake in western Montana on Thursday. This was the strongest quake in more than 20 years. Prior to that, the largest was a 7.2 magnitude earthquake in West Yellowstone 58 years ago.

The last time Yellowstone erupted was 640,000 years ago. The caldera is 34 miles long by 45 miles wide and dwarfs any other active volcano on the planet. If Yellowstone actually erupted again, it could kill thousands of people in the USA. Ash depth could be measured in feet hundreds of miles from Yellowstone. Farmland would be buried, transportation halted and civilization as we know it severely disrupted in the 8-10 surrounding states and as far away as Little Rock, Dallas, Chicago and St Louis.

The volcano has erupted at least three times and emitted more than 250 cubic miles of magma. The last time, 640,000 years ago, it was 2,500 times more destructive than the Mt Saint Helens eruption in 1980. Recent technological improvements has allowed researchers to map the current magma pocket. Scientists found that the pocket under the caldera is 2.5 time larger than previously thought and 20 miles by 55 miles wide and 6 miles deep. That is very close to the size of the pocket when the volcano last erupted.

Scientists do not believe the volcano is about to erupt despite the upsurge in earthquakes. They believe they can map the magma flows and predict when an eruption will occur. When the Bardarbunga volcano in Iceland erupted in 2014 they were able to track those flows for weeks in advance and there was plenty of warning before the volcano finally erupted. If they did start to see magma flows rising, there would be widespread alarms and time to prepare. Stay tuned.

Source 1

Source 2

Ash fall projections by USGS


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Warren Buffet's primary rules on investing:

1. Don't lose money.
2. Refer to rule number 1.

New Plays

Failed Drug Trial

by Jim Brown

Click here to email Jim Brown
Editor's Note

The pharma sector is full of one-drug wonders and sometimes those drugs fail their tests. Cara Therapeutics was one of those companies that soared on expectations and collapsed on the news.


No New Bullish Plays


CARA - Cara Therapeutics - Company Profile

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. It is developing product candidates that target the body's peripheral nervous system. The company's lead product candidate comprises I.V. CR845, which is in Phase III clinical trials for the treatment of patients with acute postoperative pain in adult patients, as well as in Phase II/III clinical trial for the treatment of uremic pruritus disease. It is also developing Oral CR845 that is in Phase IIb clinical trial to treat moderate-to-severe acute and chronic pain, as well as in Phase I clinical trial to treat uremic pruritus; and CR701, which is in preclinical trial for the treatment of neuropathic and inflammatory pain. The company has license agreements with Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan; and Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize drug products containing CR845 in South Korea. Company description from FinViz.com.

Cara had two drugs in the pipeline. CR701 is a cannabis derivative for pain management that is not an opiod. It would seem to be a promising drug but the company is not pushing it towards acceptance.

Their hot new drug CR845 is a kappa-opioid receptor that is being studied for severe itching caused by chronic kidney disease and for various types of pain.

Last week they reported results for a phase 2b study on CR845 that were not statistically significant. The three levels of medication included 1.0 mg, 2.5 mg and 5.0 mg. The 1.0 and 2.5 failed to show any results. The 5.0 mg showed only a minute improvement in pain that could have been related to the placebo effect or simply random chance. The trial was a failure.

CARA had run up significantly on the hopes for the drug. Shares imploded over five days to give back half their value. I would not normally recommend a position with such a large decline but the six day rally before the results was roughly $9 so an $11 drop just erased that last bit of irrational exuberance. With CR845 in limbo until new trials and new uses can be developed and CR701 apparently on hold for some unknown reason, the company suddenly has no appeal for investors. If light support at $13.40 fails we could see $8.50 very quickly. Investors are suddenly fleeing this sinking ship.

Expected earnings August 3rd.

Sell short CARA shares, currently $13.62, initial stop loss $15.95.
Alternate position: Buy Aug $12.50 put, currently 85 cents, initial stop loss $17.50.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.

In Play Updates and Reviews

Can You Hear Me Now?

by Jim Brown

Click here to email Jim Brown

Editors Note:

While Thursday's close was below support, the indexes picked a new direction on Friday. Thursday's "clear" directional indication was not so clear when the markets opened on Friday. The indexes gapped open on the payroll numbers and apparently triggered some short covering ahead of the weekend.

Our clear signal from Thursday developed some static on Friday. This was a holiday week with low volume, end of quarter retirement funds hitting fund accounts and some portfolio restructuring in both directions. Next week should be simpler with investors making fewer restructuring decisions and more investment choices for Q3 and the earnings cycle.

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

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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. Nice 3% gain to a new 3-month high.

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. Only a minor gain but a new high.

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. Closed at a new 3-month low.

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.

SHLD - Sears Holdings - Company Profile


CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.

CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Original Trade Description: July 5th.

Sears Holdings Corporation operates as an integrated retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.

Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.

Expected earnings August 24th.

In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.

Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.

Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.

I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.

Position 7/6/17:

Short SHLD shares @ $8.60, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


The uptick in volatility was brief but we need some additional market gains to push the VXX back to its lows.

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. The rebound was brief once oil prices rolled over.

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. Shares have fallen back to support at $8 and we need a break of that level for our $7.50 put to rise.

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 broke down to a new 8-yr low on Thursday.

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 moving over resistance in an attempt to break out.

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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