Option Investor

Daily Newsletter, Tuesday, 9/19/2017

Table of Contents

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

Market Wrap

Holding Their Breath

by Jim Brown

Click here to email Jim Brown

Most of the indexes moved sideways ahead of the FOMC meeting.

Market Statistics

The three major indexes all closed at new highs but it was definitely a battle. There was a $1.3 billion sell side imbalance in market on close orders on the NYSE according to Art Cashin. That imbalance was eventually covered without any major impact in the closing minutes.

The S&P reached its intraday high at almost 2,508 at noon and traded in a very tight 2-point range the rest of the day. Everyone was holding their breath ahead of the FOMC announcement and Yellen press conference.

The morning economic reports were mildly positive but for the most part were ignored because of the President's speech at the UN and the impending FOMC meeting.

New Residential Construction for August dipped slightly from 1.19 million in July to 1.18 million. This was well off the cycle peak at 1.32 million in October. Analysts blamed the decline on the leveling off of construction activity to a sustainable path. Builders have been burned many times in the past by racing to build more homes to fill demand only to have the demand cycle turn and leave them with unsold inventory. Builders are comfortable with the current pace and they are seeing profits rise from the increase in prices due to high demand.

Single-family starts were 851,000 and multifamily starts at 329,000 compared to 838,000 and 352,000 respectively.

August import prices rose +0.6% after a decline of -0.1% in July. The prior five months saw a total decline of -0.2% so the August rise was unexpected. This was the largest gain since June 2016. The lifting factor was fuel prices with a 4.2% jump and 4.8% rise petroleum products. These numbers were before Harvey because the survey period is earlier in the month. Export prices rose +0.6% as well. Over the trailing 12 months, import prices are up +2.1% and export prices +2.3%.

The API inventories after the bell showed a -1.44 million barrel rise in oil that was less than half the 3.9 million barrel analyst consensus. Gasoline inventories fell -5.06 million barrels and distillates fell by -6.13 million and the biggest weekly decline since 2004. The API said 13 refineries are postponing autumn maintenance for several weeks to months in order to produce more fuel and capture the high crack spreads caused by the spike in fuel prices.

Crude prices rose about 50 cents after the API numbers.

The calendar for Wednesday starts with home sales but they will not move the market. The movement will be supplied by the FOMC statement and the Yellen press conference. According to the CME FedWatch Tool, there is 100% chance there will be no rate hike. The only thing they can do to rock the market is to begin quantitative tightening or QT by reducing the amount of securities they are buying each month. Currently that averages about $60 billion. This replaces the securities (treasuries and mortgage backed securities) that mature each month. This has been discussed multiple times and some believe the start of QT could be on Wednesday. Others believe they will wait until December because of the hurricane impact on the economy.

In stock news, T-Mobile (TMUS) and Sprint (S) are back in serious talks once again over a potential merger. T-Mobile is majority owned by Deutsche Telekom and Sprint is majority owned by Softbank. The discussions revolve a stock for stock merger and T-Mobile CEO John Legere is expected to run the combined entity. However, Softbank's Masayoshi Son also wants a say in the company decisions. The challenge is getting regulators to approve a merger between the 3rd and 4th largest carriers in the US. That could reduce competition. AT&T (T) and Verizon (VZ) shares rose on that very idea that competition would be reduced. A deal has been discussed multiple times over the years but never got past the discussion stages.

The disaster for the day was Best Buy (BBY). They held their first investor day presentation in five years and now they are probably wishing they had waited another five years. The guidance was long term but analysts hated it. Best Buy is targeting revenue of $43 billion for fiscal 2021 up from $39.4 billion in 2017. They expect non-GAAP earnings of $1.9-$2.0 billion compared to $1.7 billion in 2017. That would equate to earnings per share of $4.75-$5.00 or roughly a 9% annual growth rate. Analysts were already expecting 2021 earnings at the high end of that range. Investors were underwhelmed and shares fell -9% intraday.

Cloud company Veritone (VERI) has been announcing a new partnership almost daily and the stock is exploding higher. The company focuses on AI in the cloud. They are a new company that went public in May and anybody short this stock is in a lot of pain. There was no news today but shares gained 34%. This is when you need a time machine to go back four weeks when the stock was $8.

Tesla (TSLA) shares fell slightly after Jefferies initiated coverage with an underperform rating and $280 price target. The analyst said Tesla could lose half its value if it cannot reach its production targets. He also worried that margins would decline as a result of product mix and low margins on batteries. He said achievements to date have been visionary but earnings are not going to scale quickly. He sees losses until 2020. This compares to consensus earnings for $5.33 in 2019. Competing analysts now see Tesla as a software company rather than a car company. More than 60% of Tesla's employees are programmers. Even Elon Musk says it is a software company that also makes cars, batteries and solar roofs.

The analyst picked a good spot technically for his sell call. The stock hit the resistance high on Monday and this is definitely an opportunity for a double top pattern to emerge.

Refrigerated foods producer Bob Evans Farms (BOBE) will be acquired by Post Holdings (POST) for $1.5 billion. That works out to $77 per share. The transaction is expected to close in Q1-2018. Post said it would be immediately accretive to revenue and free cash flow.

Warren Buffet has won $2 million in a bet against hedge fund returns. In 2007, Buffett offered to bet any actively managed fund that an index fund would outperform the managed fund over a 10-year period. He proposed the bet in one of his shareholder newsletters. Only one fund manager took him up on the bet. That was Ted Seides, former co-manager of Protege Partners. The bet pitted low cost S&P 500 index funds against a group of Protege's handpicked hedge funds.

The 10-year bet does not expire until December 31st but Seides has conceded. The group of Protege funds averaged 2.2% a year since 2008 and the S&P funds averaged 7%. A $1 million investment in the hedge funds would have earned $220,000 while the same investment in the S&P earned $854,000. The money will be donated to Girls Inc of Omaha, Nebraska. Berkshire Hathaway shares are up 93% over the same period.

News broke late in the afternoon that President Trump was planning on making it easier for US gun manufacturers to sell guns overseas. The president is going to shift oversight of international non-military firearm sales from the security-focused State Department to the trade-focused Commerce Department. This could be a windfall for US gun manufacturers. Since other countries can sell into the US, we should be able to sell to other countries. This is another example of how the president is trying to reduce trade restrictions and benefit US companies.

After the close, FedEx (FDX) shares fell sharply after profits declined 17% because of a June cyberattack on its TNT Express business in Europe. This caused significant delays in shipping and shutdown TNT for a prolonged period. FDX said that "most" of TNT operations are up and running but profits, revenue and package volumes are still down from prior levels.

FDX reported earnings of $2.19, down from $2.65 in the year ago quarter. Adjusted earnings were $2.51 and that was a major miss of estimates at $3.17. Revenue rose 4% to $15.3 billion and also missed estimates for $15.37 billion. They guided for the full year to earnings of $12.00-$12.80 and down from the prior forecast for $13.20-$14.00. Shares fell about $4 in afterhours after an initial $9 drop.

Adobe Systems (ADBE) reported earnings of $1.10, which beat estimates for $1.00. Revenue of $1.84 billion rose 26% and beat estimates for $1.81 billion. They guided for the current quarter for revenue of $1.95 billion and earnings of $1.15. Analysts were expecting $1.95 billion and $1.10 for earnings. Shares fell $5 on the in line revenue guidance.

Bed, Bath and Beyond (BBBY) reported earnings of 67 cents that missed estimates for 93 cents. This was also lower than the $1.11 in the year ago quarter. Revenue of $2.9 billion missed estimates for $3.0 billion. They said the earnings were impacted by an 8 cent restructuring charge, 2 cents due to Harvey and 1 cent due to an accounting change. Shares fell sharply to to $21.50 after closing at $27.02 but recovered to end the session at $24.

Hurricane Maria is going to blow right over Puerto Rico but then turn north and miss much of the Bahamas and Florida. Based on current estimates it could make landfall in North Carolina or anywhere north of there. Hurricane Jose is still loitering off the East Coast and the closer Maria gets the more the two storms will interact. Jose could push Maria onto land, or farther out to sea, or they could combine for an even bigger mess in the NJ/NY area. The yellow X in the bottom graphic is the remnants of tropical storm Lee, which has broken apart.

On this date in 1985, an 8.1 magnitude earthquake hit Mexico and more than 10,000 people were killed. In memory of that earthquake, many building managers held earthquake drills on Tuesday morning. On Tuesday afternoon a 7.1 magnitude earthquake hit just outside Mexico City. The amount of damage is still unknown but I am sure residents were glad they participated in the drill this morning.


The biotech sector declined -1% to close at a two week low. There was no specific reason other than there were strong gains since late August and traders decided to take profits. The decline in biotech stocks weighed on the Russell 2000 and the Nasdaq. The chart suggests the decline may not be over.

The biotechs were more than likely a drag on the S&P as well and the index gained less than 3 points. Healthcare stocks were also a drag. This was a new high and it was another close over 2,500. Both of those items are bullish.

Typically, the market posts gains on the Tuesday before a Fed announcement so today qualified but the gains were minimal. This suggests traders are more than a little concerned about the outcome.

The biggest decliner on the Dow was UnitedHealth (UNH) on worries the Obamacare repeal might actually happen this time. Lawmakers have come up with what they believe is a better plan and they might actually get it passed. The healthcare stocks were hammered with CNC -5%, AET -3%, MOH -6%, CI -2%, ANTM -2% and UNH -2%. One of the features of the replacement bill is the halt to government subsidies to these healthcare companies.

UNH removed 24 points from the Dow and the financial stocks, energy and telecom added significantly more points. If the Dow can keep the rotation going with new leaders every day, we could see some higher highs.

The next target is 22,500 and round number resistance.

The Nasdaq Composite only gained 6 points and closed right on resistance at 6,460. The index is poised to breakout with any further gains. The big cap tech stocks contributed to the gains but they were still mixed. If you look at the stocks in the winners/sinners list below, there are a lot of biotech/medical stocks in the loser column.

The Nasdaq has been moving very slow since that big short squeeze the prior Monday and it is about time for a large directional move. Let's hope that direction is positive.

The Russell 2000 was the weakest of the broad market indexes because of biotechs. Despite that drag, the Russell managed to post only a fractional loss thanks to the positive input from the financial sector. If the Russell can eventually more to a new high over 1,450 this market could catch fire.

Traders are walking on eggshells and are barely trading. Volume was only 5.8 billion shares and the A/D was almost dead even. I do not know what they expect to happen post Fed and I am in the same boat. I see no reason to put new money at risk until after we see what happens on Wednesday.

There is always another day to trade if you have money in your account.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Which Way Are We Going?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Traders appear to be unsure of market direction and volume is low. Market direction is a coin toss after the FOMC announcement. The lackluster markets so far this week coupled with the low volume and flat advance/decline line, suggests traders are unsure about post Fed direction. We should never put new money to work when market direction is a coin toss.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Indexes Stall

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P, Nasdaq and Russell posted minimal gains or losses while the Dow continued higher. Sellers have not disappeared. The Dow may have squeezed out a 39-point gain but the other indexes are struggling. The Russell was flat with a fractional loss. The S&P gained less than 3 points and the Nasdaq closed almost exactly on resistance at 6,460 with only a 6 point gain.

The market breadth is fading but we do have the FOMC meeting on Wednesday as a hurdle for investors. How we trade after the meeting is more important than today's moves.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

GE - General Electric
The short stock position was closed at the open.

VXX - VIX Futures ETF
The short stock position was entered at the open.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

ETSY - Etsy Inc - Company Profile


No specific news. Shares still flat after the big decline on Friday.

Original Trade Description: Sept 13th.

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

For Q2, the company reported earnings of 10 cents that rose from a 6-cent loss in the year ago quarter. Revenue rose 19.1% to $101.7 million. Active sellers rose 10.9% to 1.83 million. Gross merchandise volume rose 11.7% to $748 million. Sales on mobile devices rose 47%. International sales rose 31% to 32% of gross sales. The number of employees in the workforce declined 23% thanks to an aggressive push by the CEO to expand profitability.

They guided for gross merchandise sales to rise 12% to 14% for the full year, up from prior guidance of 11.7%. Full year revenue is expected to rise 18% to 20% and in line with the 19.1% in Q2.

The company is growing rapidly, especially internationally and they are reducing costs significantly. Over the last several months, they replaced the CEO, CFO and CTO in their push to grow the company and profits quickly.

Expected earnings Nov 2nd.

On Sept 7th a Davidson's analyst, Tim Forte, went all in on ETSY with a glowing forecast. Shares spiked to $17.50 and then faded for a couple days. They have rebounded over the last three days and closed at a new high on Wednesday.

Position 9/14/17:

Long ETSY shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.

HIMX - Himax - Company Profile


Monster 5% decline on no news.

Original Trade Description: Sept 9nd

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax produces video drivers for 4K TVs and that accounted for 36% of total revenue in Q2. However, the big news comes from the 3D sensing chips. They are expecting a 90% increase in revenue from this technology in Q3. There are rumors that Himax is going to supply the 3D sensing technology for the new iPhones. Since several companies are rumored to have been selected, somebody is riding the rumor wave.

Since Himax guided for a 90% increase in revenue in Q3 from those sensors, it would suggest there is a surprise in store for the chip community.

They also provide chips for vehicle display panels and they recently guided for demand to jump from 135 million units in 2016 to 200 million by 2022.

On August 30th, Qualcomm and Himax jointly announced a new high resolution, low power, active 3D depth sensing camera system to enable conputer vision capabilities such as biometric face authentication, 3D reconstruction and scene perception for mobile, IoT, surveillance, automotive and AR/VR. They specifically said it would enable Android smartphones to have unparalleled 3D experiences. They called it "game changing technology for smartphones." This technology is the culmination of 4 years of research and development by these two firms.

Shares rallied on the announcements but then faded last week. The company issued a press release suggesting an Oppenheimer analyst had become too excited about the prospects and they reaffirmed their recent guidance. The fading excitement erased $1.50 in gains but support appeared at $10 and the overall uptrend should resume.

Expected earnings November 7th.

Position 9/11/17:

Long HIMX shares @ $10.31, see portfolio graphic for stop loss.
Alternate position: Long Dec $11 call @ $1.20, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


Kratos received an $8.2 million order for specialized products for protection of GPS satellites.

Original Trade Description: August 14th.

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 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 department spending.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. 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.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Update 9/5/17: New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

Update 9/6/17: KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.

MRVL - Marvel Technology - Company Profile


No specific news. Susquehanna said Marvel gained market share in Q2 thanks to rising use of SSD.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Oct $18 call @ 64 cents, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


No specific news. New high close. Officials claim bogus online transactions are surging after the Equifax hack.

Original Trade Description: August 26th.

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. Company description from FinViz.com.

Symantec is the largest provider of security products for retail buyers. They have an excellent suite of firewalls and antivirus programs. I have used everyone in the market at one time or another and Symantec has always been the best for me.

Last week they announced something different. They announced a secure router that handles everything in your house. It has special security for smartphones, tablets, PCs, IoT devices, etc. It has a handy user friendly interface and you can set at the router level, individual passwords for everyone in the family with individual settings by password. Say you have a 12 year old boy in the house. You can set different parental exclusions for him than you would for an 8 year old in the same house. You are in charge of everyone's access regardless of what device they are using.

The secure router blocks attacks before they get to your PC and before Windows has to deal with them. The router is not cheap but compared to what it does, it is cheap for the number of functions. How much does it cost to have your PC compromised? The router is $300 and comes with a year of service. After the year is up it goes to $10 a month. That is an entirely new revenue stream for Symantec. Obviously, it will not show up in their earnings for several quarters but the stock is rising on the news.

You can read the full press release HERE.

Expected earnings Nov 1st.

The stock is at the upper end of the range that I recommend in Premier Investor. With the potential for volatility in September, I am not recommending we go long the shares. This will be an option only position so we can try and ride out some of the volatility with minimum risk.

Update 8/28: Symantec said over the weekend they have identified a sustained cyber spying campaign, likely state sponsored, against Indian and Pakistani entities. The espionage effort began in October. India, China and Pakistan have raised military readiness over the last several weeks.

Update 9/6/27: Symantec said the US and EU power grid had been hacked by state actors and they had gained access to core systems that would have allowed them to be shutdown. The hacks were loosely tied to a recently dormant group called Dragonfly with links to Energetic Bear or Kola, widely believed to be sponsored by Russia.

Update 9/11/17: Shares of Symantec continue to soar after Google reported that searches for "LifeLock" had exploded and surged even higher than after the Anthem hack in 2015. Symantec's LifeLock monitors the credit bureaus and notifies you if anyone tries to open an account in your name. It carries a $25,000 reimbursement for stolen funds and retails for $9.95 a month. This is going to be a boost to Q3 earnings.

Update 9/14/17: The halt to US sales of the Kapersky virus suite, made in Russia, is another plus for Symantec.

Position 8/28/17:

Long Oct $31 call @ 48 cents, see portfolio graphic for stop loss.


BEARISH Play Updates

DF - Dean Foods - Company Profile


No specific news. Shares finally broke support to close at a new 5-year low.

Original Trade Description: September 16th.

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The CEO warned, that volume and mix challenges are occurring at a higher-than-planned rate. As such, given the resulting volume shortages, they lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

On August 22nd the CFO resigned unexpectedly, effective Sept 1st. That is never good when a CFO exits with only one-week's notice.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

We shorted this stock on August 10th at $11.37 and shared dipped about 60 cents then rebounded to take us out of the short. The long put ended 6 cents in the money after shares began to roll over again. I believe we are going to see new lows.

Position 9/18/17:

Short DF shares @ $11.02, see portfolio graphic for stop loss.
Alternate position: Long Dec $10 put @ 40 cents, see portfolio graphic for stop loss.

GE - General Electric - Company Profile


We exited GE at the open and later in the day a JP Morgan analyst reiterated a bearish view and the stock fell sharply from the opening high. Our timing on the exit was either a day early or a day late. We still have the long put option. The analyst is targeting $22 on GE. The option position will move to the Lottery Play section.

Original Trade Description: September 11th.

General Electric Company operates as an infrastructure and technology company worldwide. Its Power segment offers gas and steam power systems; maintenance, service, and upgrade solutions; distributed power gas engines; water treatment, wastewater treatment, and process system solutions; and nuclear reactors, fuels, and support services. The company's Renewable Energy segment provides wind turbine platforms, and hardware and software; onshore and offshore wind turbines; and solutions, products, and services to hydropower industry. Its Oil & Gas segment offers surface and subsea drilling and production systems, and equipment for floating production platforms; and compressors, turbines, turboexpanders, reactors, industrial power generation, and auxiliary equipment. The company's Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, and electric power and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment offers diagnostic imaging and clinical systems; products for drug discovery, biopharmaceutical manufacturing, and cellular technologies; and medical technologies, software, analytics, cloud solutions, and implementation services. The company's Transportation segment provides freight and passenger locomotives, and rail and support advisory services; and parts, integrated software solutions and data analytics, software-enabled solutions, mining equipment and services, and marine diesel and stationary power diesel engines and motors, as well as overhaul, repair and upgrade, and wreck repair services. Its Energy Connections & Lighting segment offers industrial, grid, power conversion, automation and control, lighting, and current solutions. The company's Capital segment provides industrial and energy financial services; and commercial aircraft leasing, financing, and consulting services. Company description from FinViz.com.

GE has been struggling for the last several years. They manufacture hundreds of products from $10 items to $10 million items. After the financial crisis they did everything possible to exit their financial divisions and escape the "too big too fail" SIFI designation. They accomplished that in 2016.

Their biggest problem today is negative cash flow. It is a great company and is in no danger of failing but they are not generating enough cash to cover operating expenses, a 4% dividend and a whopping $21.1 billion stock buyback authorization through 2018.

They have been downgraded by almost everyone and JP Morgan said last week the stock needs to fall to the mid to high teens before it will be investible again. Shares closed at $23.72 today. With the stock nearing a three-year low, the odds are good, once that happens, we will see a continued drop into the teens.

JP Morgan suggested they would be forced to A) cut the dividend, which is not going to happen, B) sell something to raise cash, C) stop the $21.1 billion remaining on their stock buyback. Shares closed negative on Monday with the Dow up +259.

Earnings Oct 20th.

Update 9/18/17: GE said it had received its 10,000th order for its advanced energy saving locomotive. The company said it was also working on an AI robot that could save $200 billion in power costs by intelligently monitoring and controlling power consumption and distribution on the electrical grid.

Position 9/13/17:

Closed 9/19/17: Short GE shares @ $23.93, exit $24.46, -.53 loss.
Alternate position: Long Dec $23 put @ 58 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


No specific news. Since this is a long-term position there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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