Option Investor

Daily Newsletter, Saturday, 9/30/2017

Table of Contents

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

Market Wrap

First Time in 20 Years

by Jim Brown

Click here to email Jim Brown

The Dow has posted an 8-quarter winning streak for the first time in 20 years.

Weekly Statistics

Friday Statistics

The Dow is getting all the headlines for its performance for the quarter but it only gained 4.7% for the entire quarter. However, the Russell 2000 is up 9.9% just since the August 21st lows. The small caps are the real performers and helped boost sentiment so that the big cap indexes could reach those new highs.

All the major indexes, except for the Dow, closed at new highs on Friday. The Dow missed a new high by 7 points. This was the first time since 2013 that the market posted gains in September. The Dow gained 4.7%, S&P 3.8%, Nasdaq 5.7% and Russell 5.4%.

Friday's economic reports were ignored just like all the prior week's reports. Investors are not concerned with economics because we are growing very slowly and the numbers lack any enthusiasm. The hurricanes are another reason the economic numbers will be ignored until 2018. The next three months will have choppy data that does not relate to the normal trend and skewed by the storms.

Personal Income for August rose +0.2% after a revised +0.3% gain in July. Personal Spending declined -0.1% after a +0.2% rise in July. This was the first decline since January and analysts blamed it on the hurricanes.

The final revision for the September Consumer Sentiment showed a -1.7 point drop to 95.1. This is still strong but the first half excitement is fading. The present conditions component rose fractionally from 110.9 to 111.7. The expectations component declined from 87.7 to 84.4. Rising gasoline prices because of Hurricane Harvey were a big hit to current sentiment.

We have an active economic calendar for next week with the payroll reports, ISM reports and another 12 speeches from Fed officials including Janet Yellen on Wednesday. We learned on Friday that President Trump had interviewed four people for the job of Fed chairman and he said he would announce his decision in 2-3 weeks. Personally, I believe Trump's type A personality does not jive with Yellen's meek, laid back, nerdy economist style. He surrounds himself with strong individuals. He has met with Kevin Warsh, a former Fed governor, about the position and he would be a perfect candidate for Trump, assuming Gary Cohn did not rehabilitate his standing before the president made a decision.

Picture from CNBC

The payroll reports are expected to show declines as a result of the storms. Business stopped in Houston and Florida after the hurricanes hit. Many businesses were closed for weeks with quite a few still closed. Temporary cleanup jobs may inflate the numbers slightly but whatever the numbers are, they will be ignored.

There are very few earnings on tap for next week with Costco the highlight on Thursday. I expect Costco to beat expectations and raise guidance and end all the Amazon/Whole Foods worries.

Yum China and Constellation Brands also report on Thursday. The pace of earnings does not accelerate until the second week of October.

KB Homes (KBH) reported earnings of 51 cents that beat estimates for 47 cents. Revenue of $1.14 billion beat estimates for $1.12 billion. The builder said damage from Harvey and Irma was minimal but they expected closings to be delayed by the storms and the impact on closings of homes buyers were selling in order to buy a KBH home.

Lennar (LEN) reports earnings on Tuesday and they said the storms had delayed deliveries on about 700 homes from the current fiscal quarter into next quarter. Harvey impacted about 120 new orders and will delay 130 deliveries in Q4.

Tyson Foods (TSN) raised its guidance and announced a restructuring that includes layoffs. The company raised earnings guidance for fiscal 2017 from $4.95-$5.05 to $5.20-$5.30 per share. They guided for fiscal 2018 for earnings of $5.70-$5.85, which would be the 7th consecutive year of record earnings. They are cutting 450 jobs with most positions coming from within the corporate office. They will take a charge of $140-$150 million this year but they plan to save $1.2 billion over the next three years. They credited the increased 2017 earnings to strong beef segment performance.

Nearly two million people watched at least a portion of the Amazon live stream of Thursday Night Football. There was a pregame show with Amazon products advertised and there were some streaming issues including slow feeds and buffer issues. Obviously, Amazon has the capability to fix the bandwidth issues by next week. Analysts said it appeared to be a successful first test. Actual viewers averaged about 372,000 for the duration of the game. Amazon said there were viewers from 149 countries.

Whole Foods said customer card information had been stolen from its restaurants, taprooms and other venues in its stores but not from the regular grocery checkout process. The onsite services businesses use a different point of sale system than the regular store system. More than 40 Whole Foods stores sell beer on tap. None of the Amazon related systems were involved.

The WSJ said Amazon sold $1.6 million in Whole Foods branded products on the Amazon website in just the first month. They would have sold more but most products sold out.

The Whole Foods CEO, John Mackey, said Amazon saved them from the "whole paycheck" trap. That was the nickname for Whole Foods because of their high prices. Mackey said, "We were in that trap and I couldn't quite figure out how to get out of it." Within two weeks of the closing, prices fell 25% to 43% over a broad range of products. "I feel like Houdini now that I have escaped the trap." Bernstein said Amazon's next big push will be into the retail pharmacy industry. The analyst, Lance Williams, said Amazon is already in talks with distributors and could easily buy or partner with a pharmacy benefit manager (PBM) to drive volume growth. The addressable market for Amazon in this sector would be in the $300 billion range. Williams said it would be simple for Amazon to gain significant market share in the sector because an estimated 70% of subscriptions are already heading to online fulfillment. The risk is to CVS, WBA and RAD.

Jefferies said Amazon is going to control the toy market this holiday season. With Toys-R-Us in bankruptcy, Amazon is going to have less price competition. In the last two months of 2016 Amazon sold about $2 billion in toys compared to $4.66 billion by Toys-R-Us. Those numbers could reverse in 2017. Toys-R-Us owes more than $500 million to the top 20 toy makers. The odds are good they are not going to be getting more toys on credit.

Apple said it received a record number of national security requests for data in the first half of 2017. They received more than 13,250 requests on more than 9,000 accounts. They are prohibited from giving the exact numbers. In the same period in 2016, they received over 5,750 requests. Google said it received up to 500 requests affecting more than 1,000 accounts over the same period. These companies do not have to respond to the National Security Letters (NSLs) and requests from the Foreign Intelligence Surveillance Act (FISA) but they do because they do not want the headache of picking a fight with the government when the odds are good they would lose.

There are multiple reports that the iPhone 8 has a battery problem. When charging the batteries swell and push the fronts off the phone. On some of their phones, Apple uses Samsung batteries, the same company that made the exploding batteries on the Note 7. Apple has confirmed that it is looking into the problem.

Every day there are more headlines about slow sales of the iPhone 8. Several analysts have tried to decide just how bad it is and found out that sales are conforming almost exactly to Apple guidance. The guidance suggests sales of the 8 and X are expected to be about 50:50 and most buyers are waiting for the X before they decide which phone they are going to buy. That means November sales could be dramatic "if" Apple can deliver enough model X phones. Apple reports earnings on Oct 31st, just a few days after orders open for the model X and before the phone actually begins delivering. Guidance will be super critical.

Digitimes reported that Apple told its suppliers last week to ship only 40% of the original iPhone X components and hold the rest until released by Apple. Reportedly, Apple wants to see how many orders it receives on Oct 27th before moving forward with additional production.

Apple shares fell after the product announcement as expected. The 8.3% decline was a little more than the normal 4-6% because of the staggered delivery and worries over production problems. Normally the decline lasts about 3-4 weeks.

Susquehanna Financial said on Friday they believe the reports that British retailer Sports Direct is in talks to buy Finish Line are accurate. Sports Direct has been building a position which rose to 8% in mid August. Overall Susquehanna believes the company has acquired as much as 21% through "contracts for differences" or CFDs, which is a type of derivative, with ETX Capital acting as the counterparty. Sports Direct operates 468 stores in the UK and 289 internationally. Finish Line has 950 stores in US malls.

In late August, Finish Line adopted a poison pill intended to thwart a takeover attempt by Sports Direct. The UK retailer recently completed a US acquisition in June of 50 Bob's Stores and Eastern Mountain Sports adventure schools. Wedbush said in mid September the poison pill was to force conversation with Sports Direct and prevent an outright change of control through share accumulation. The pill becomes effective if anyone acquires more than 12.5% ownership in the shares. The board has the right to cancel the poison pill at any time as long as the trigger threshold has not been reached.

Zogenix (ZGNX) said an experimental treatment for a rare form of epilepsy met the goals in a late-stage study. The drug was being tested against a placebo in children having Dravet syndrome, a genetic dysfunction in the brain that leads to potentially fatal, long-lasting, fever-related seizures that do not respond to standard treatment. The drug ZX008 demonstrated statistically significant improvements including clinically meaningful reductions in seizure frequency and seizure free intervals. The number of seizures declined 63.9% to 72.4% in various groups and dosages. Shares spiked 172% on the news.

Albemarle (ALB) shares rose $4 after Chile said there was no reason not to approve the company's request to increase annual lithium production from 80,000 tonnes to 125,000 tonnes. ALB recently said it had discovered a new technology that would allow them to produce more lithium without using more brine from the Atacama salt flat in northern Chile. ALB said they would invest $1 billion in Chile over the next five years if the request were approved. The rapid advance in electric car production is creating high demand for lithium batteries.

Conn's (CONN) spiked 7% at the open after Oppenheimer raised their rating to outperform and set a $40 price target. The analyst said the outlook for their credit business had improved. The business is now under the direction of a new CEO, Norm Miller, and a freshly assembled team of senior leaders. The analyst said, "The market appears to meaningfully under appreciate the nearer and longer-term EPS power of a better functioning business model." Shares spiked 10% for the day.

Crude prices declined slightly after trading as high as $52.86 on Thursday. The $52 level is seen as strong resistance. There is no fundamental reason for the rise in prices other than miscellaneous headlines and speculation. US production rose to 9.547 million bpd and just shy of the 2015 peak at 9.61 million bpd.

The rise in crude prices prompted the activation of six additional oil rigs for the week ended on Friday. As long as prices remain over $50, we should see additional rigs added. The $50 level is the magic number. Cost to produce a barrel in the Permian, Eagle Ford and the SCOOP is between $24-$27. Prices over $50 allow producers a profit after allowing for transportation and discounts for the ultralight shale oil. It also allows them to hedge future production for a profit and continue to maintain an active drilling program in the months ahead.


Analyst Ryan Detrick pointed out that the S&P has only moved a daily average of 0.4% in September but hit a record high after being up 10% for the year. This has only happened 12 times since 1950 and 92% of the time the S&P gained 6% in Q4. That works out to 11 of those 12 times. Since Q4 is normally strong, it is even stronger when there is strength in September and throughout the year leading up to it. Detrick said the S&P could rally an additional 6% in Q4.

It has been 455 days since the S&P had a 5% decline. The average is twice a year. This is the fourth longest period in history without a 5% decline. That means there are a lot of investors still waiting on the sidelines for a buying opportunity. As evidenced by the Russell spike last week, a few portfolio managers gave up on waiting and started chasing stocks.

Friday was the nine-year anniversary of the worst point decline ever on the Dow after the House of Representatives rejected the $700 billion bailout plan in September 2008. The Dow declined -777 points on the news.

The changes in sentiment never seem to be what I expect. With the market setting new highs, bullish sentiment declined nearly 7%. This does end on Wednesday and the Dow was negative the first three days of the week and that was probably the cause for the sentiment decline. Next week's survey will be interesting.

Volatility is evaporating from the market on a daily basis. The VIX has now traded below 10 for 47 days in 2017. The 24-year closing low is 9.36 and we came close on Friday at 9.51.

One analyst explained it this way. In 2002, there were 110 ETFs. Today there are more than 1,800 ETFs. In 1995 the Vanguard S&P-500 ETF had $12 billion in assets. Today it is nearly $600 billion and takes in roughly $25 billion a month. More than 38% of the money invested in the market is in index ETFs. Investors have changed to a passive investment strategy rather than picking stocks. This is probably due in part to the aging of the baby boomer generation. They are moving their portfolios into ETFs and bonds rather than personal investments.

This does not mean volatility will not return. I am very confident we will see volatility back over 30 at some point in the future. Historically, periods of low volatility are always followed by periods of high volatility. Some event(s) arrive that rock investors and everyone runs to the exits at once. Numerous analysts have warned that the shift to ETF investing will eventually create higher volatility because a significant event could create a wave of selling and there will not be any buyers. We saw this in the flash crash several years ago when bids for ETFs disappeared and they went into free fall.

Fortunately, there are no expectations for this in the short term. There are no obvious events on the horizon that should produce significant volatility until early December when the budget battle and debt ceiling come back to haunt us.

The S&P surged to 2,519 at the close and well over the prior resistance at 2,508. This is a clear breakout and we could see additional gains as end of quarter retirement funds hit accounts on Monday. Friday's surge was probably window dressing for those quarter end statements.

Helping to keep investors in the market is the beginning of Q3 earnings two weeks from now. Everyone is placing their bets for the earnings cycle. Q3 is not going to be as strong as the rest of the year but it is still positive earnings growth. Earnings for the year are listed below. Q3 is expected to fade slightly but rebound in Q4.

Q1 15.3%
Q2 12.3%
Q3 6.2% est
Q4 12.2% est

If we were to actually get a tax reform package where corporate earnings were slashed, it would be very positive for the 2018 market. Every 1% decline in corporate taxes is expected to add $2 a year in S&P earnings. For 2017, the S&P-500 is expected to earn $131. For 2018 that rises to $140. The current PE ratio is 17.8 so that $9 rise is worth 160 additional S&P points in 2018. If taxes were cut by 5% that would add $10 to earnings and at the current PE ratio of 17.8 it would add another 178 points to the S&P. That is 338 points total. Obviously, the rise in the S&P based on earnings expectations is easy to calculate but nearly impossible to actually occur. There are far too many variables but 338 is a potential possibility based on pure math.

For next week, we just want to see the S&P add a few more points and stay above the red uptrend resistance line on the chart below.

The Dow has now posted eight quarters of consecutive gains and that has not happened in the last 20 years. That means we have another streak that will eventually fail. This is like watching a roulette ball fall on a red number for 8 consecutive spins. Everybody will be piling up money on black. I have seen a lot of money lost on that strategy. In Reno I saw 21 straight red numbers. Thousands and thousands of dollars were lost betting on black for the last 15 rolls. By the time black finally appeared, all those betters were broke. A roulette ball has no memory. Where it falls is truly up to chance.

In the market, investors have a memory. That means streaks matter and investors will be more cautious betting on a continued streak higher. Fortunately, a quarter is an eternity in the market and memories tend to fade as investors see the dollar signs increase. Investors already believe the market cannot decline and every miniscule dip is bought. Eventually reality will return.

The big cap tech stocks were positive on Friday but only the high dollar stocks (PCLN, GOOGL, AMZN) posted a decent gain. The move was broad based with Nasdaq advancing volume 1.2 billion to declining volume of 505 million shares. Advancers of 1,560 beat decliners of 1,179. It was nice to see the leadership broaden out but there is still plenty of room for improvement with nearly 1,200 decliners.

The index surged at the open to reach its intraday high about 1:PM and then held those gains the rest of the day. I firmly believe this was related to quarter end window dressing in an already positive market.

Resistance is well above at 6600-6650 with support well back at 6,350 and Monday's lows.

If there was ever a chart that demonstrated short covering and price chasing this is it. The big rebound from the August 21st lows barely stuttered when it hit resistance at 1,450 and when there was no selling, the shorts raced for the exits as portfolio managers chased prices as they window dressed for the end of the quarter. With big caps relatively weak since Monday it appears there was a lot of rotation underway with managers exiting those big cap stocks and loading up on small caps for the Q3 earnings and best six months of the year, which starts on Nov 1st.

This was the best monthly gain for the Russell since Nov 2011.

It may appear that any worries over profit taking or the impact of various headlines have disappeared. Unfortunately, that is not the case. In the news this weekend, we have North Korea moving fighters with anti-air missiles and extended range fuel tanks to the eastern coast where US planes flew a mission last week. With Kim saying war has been declared and we can shoot down US planes wherever we find them, this positioning of long-range fighters has ominous repercussions.

Secondly, it was reported on Friday that several long-range missiles have been moved from the development facility and have disappeared from satellite tracking. On October 10th, North Korea celebrates becoming a communist country and there are big celebrations and Kim likes to do something provocative just to prove he can. If he does not do it on the 10th then Oct 18th is a big celebration in China and he has done missile launches and bomb tests during that celebration to show he is not afraid of China.

If he just launches another missile, the market will ignore it. If he tries to shoot down US or South Korean planes, it will not be ignored. If by chance he follows through with his threat to launch an H-bomb over Japan and explode it in the Pacific, the market is likely to react badly. There are also reports that Russia and China are massing troops on the North Korean border.

There is always a geopolitical event somewhere in our future. The expected events will be ignored. It is the unexpected events that cause trouble in the market.

The fundamental market outlook is strong. Earnings are good, the economy is growing, the Fed is on hold until December and tax reform is in the wind. It may be in the wind until 2018 but at least the constant headlines will keep investors interested in the market.

Monday and Tuesday should be positive from inflows of end of quarter retirement cash. Yellen's speech on Wednesday could be a hiccup if she feels she needs to clarify her confusing comments in last Wednesday's speech where she was both hawkish, dovish and confused in the same speech.

With the Russell gaining 9.9% in just over a month, there is a very good chance we will see some profit taking. The Dow is lagging the rest of the market and until it breaks out again, there is always risk.

I would make a list of stocks you would like to buy at cheaper prices and set some money aside just in case a buying opportunity appears. The market does not need a reason to take profits. Sometimes it just appears. Until then, the trend is our friend.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Enter passively and exit aggressively!

Jim Brown

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"The attitude that you have a parent is what your kids will learn from you, more than what you tell them. They do not remember what you try to teach them. They remember what you are."

Jim Henson


New Plays


by Jim Brown

Click here to email Jim Brown
Editor's Note

DSW is becoming new with a new mission and new marketing campaign to gain market share in a weak sector.

Thursday's recommendation was CONN and the stock was upgraded before the open and gapped higher by nearly $2. That negated the recommendation. We do not enter positions with a gap open of more than $1.


DSW - DSW Inc - Company Profile

DSW Inc., together with its subsidiaries, operates as a branded footwear and accessories retailer in the United States. The company operates through two segments, DSW and Affiliated Business Group. The company offers dresses, casual and athletic footwear, and accessories under various brands for women, men, and kids. It also provides handbags, hosiery, jewelry, and other accessories. As of August 29, 2017, the company operated 511 stores in 43 states; dsw.com, an e-commerce site; and m.dsw.com, a mobile site, as well as supplied footwear to 379 leased locations in the United States. DSW Inc. was founded in 1917. Company description from FinViz.com.

The CEO recently said "we seen an opportunity to acquire market-share as the retail industry consolidates." "We have reinvigorated and positioned DSW to benefit, beginning with a new brand mission: We inspire self-expression."

They have reorganized their stores, updated their marketing, added customer merchandise and expanded their online presence. Marketing statement

They reported Q2 earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million beat estimates for $669.2 million. They guided for the full year for earnings of $1.45-$1.55 and analysts were only expecting $1.44.

They announced a new $500 million share buyback program on top of $33 million left over from the prior authorization.

Expected earnings Nov 21st.

Shares closed at a 5-month high on Friday and on the verge of breaking out of a 10-month consolidation period.

I really like the option on this position. We can buy $1 OTM for January for $1.35.

Buy DSW shares, currently $21.48, initial stop loss $19.50.
Alternate position: Jan $22.50 call, currently $1.35. No initial stop loss.


No New Bearish Plays

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

In Play Updates and Reviews

Setting the Market on Fire

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index added another 2 points to its record run. The small cap Russell 2000 has started a fire under the rest of the market with its stunning gains. When the small cap stocks lead, the rest of the market follows. The Dow is still struggling with some rotation out of big caps but it did close only 7 points below its high. The Nasdaq and S&P both broke out on a surge in volume. It truly was a September to remember for the small cap index.

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

CONN - Conn's
The stock gapped up more than $1 at the open and the entry was cancelled.

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BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


No specific news. No gain. Waiting for the next headline.

Original Trade Description: Sept 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Oct 24th.

Nvidia (NVDA) shares were rocked last week after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.

Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.

The chart is ugly with no apparent trend but there is decent support at $12. They could easily catch fire as investors begin to understand the ramifications of the partnership and we could see another leg higher like the one that started the prior May. There are no guarantees but I do not believe anyone sees AMD's future as anything but positive given recent events.

Update 9/25/17: AMD and Nvidia declined after Intel announced the next generation in the Core CPU line for desktops. This 8th generation Core-i7-8700K is the bet gaming processor ever with an internal clock frequency of 4.7 Ghz and Intel's fastest ever. They will also support 4K video. This is a challenge for AMD but the company is still ahead of Intel in the GPU race.

Position 9/25/17:

Long AMD shares @ $13.25, see portfolio graphic for stop loss.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.

DVAX - Dynavax - Company Profile


No specific news. Nice gain and another close above the consolidation pattern.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Shares recovered from a dip at the open to close flat.

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.

Update 9/21/17: KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

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.

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.

BEARISH Play Updates

FDC - First Data - Company Profile


No specific news. Minor gain.

Original Trade Description: September 16th.

First Data is a global leader in commerce-enabling technology, serving approximately six million business locations and 4,000 financial institutions in more than 100 countries around the world. The company's 24,000 owner-associates are dedicated to helping companies, from start-ups to the world's largest corporations, conduct commerce every day by securing and processing more than 2,800 transactions per second and $2.2 trillion per year. Company description from FDC.

First Data earnings will be impacted by the three hurricanes because retail activity was slowed significantly over the weeks following the hurricane impacts. FDC said retail activity declined 72% in the first three days and was not expected to resume significantly for weeks. Stores need to recover from the floodwaters and flooding. They need electricity restored in order to run registers and POS terminals.

Expected earnings Nov 6th.

FDC also had the unfortunate luck of filing for a secondary offering of 85 million shares with an overallotment allowance of another 12.75 million on September 11th, just after the twin storms. The shares were sold by New Omaha Holdings, a major shareholder in FDC. With only about 300 million shares actively traded that is close to a 25% increase in the float. The shares were priced on Sept 18th at $17.75 each.

Selling nearly 100 million shares when your shares are already depressed would be expected to depress them even further. Shares closed at $17.55 on Wednesday and the 4-month low close is $17.47. Any further decline could put them into free fall to major support at $15.

There is always the potential for an earnings warning over the next several weeks.

Update 9/28/17: FDC announced a new service called Disburse-to-Debit to allow companies that hire temporary workers or "gig" workers to pay them instantly upon completion of a task by sending the money to their debit cards. This works for people like Uber drivers, part time workers at special events or even insuranve companies paying claims. An agent can upload the user data and the debit card payment arrives instantly. This is a smart service and FDC shares rallied 33 cents on the news.

Position 9/28:

Short FDC shares @ $17.56, see portfolio graphic for stop loss.
Alternate position: Long Jan $17 put @ 70 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.

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.

CIEN - Ciena Corporation - Company Profile


No specific news. Shares rebounded $1 for the week.

Original Trade Description: Sept 2nd

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Networking Platforms segment offers hardware networking solutions optimized for the convergence of coherent optical transport, optical transport network switching, and packet switching. Its products include 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, Waveserver stackable interconnect system, CoreDirector Multiservice Optical Switches, and OTN configuration for the 5410 Reconfigurable Switching System, as well as Z-Series Packet-Optical Platform; 3000 family of service delivery switches and service aggregation switches, and the 5000 family of service aggregation switches, as well as 8700 Packetwave Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch; and 4200 Advanced Services Platform, Corestream 5100/5200 Advanced Services Platform, Common Photonic Layer, and 6100 Multiservice Optical Platform. This segment also sells operating system software and enhanced software features embedded in each of these products. The company's Software and Software-Related Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; and Blue Planet network virtualization, service orchestration, and network management software platform, as well as related installation, support, and consulting services. Its Global Services segment provides consulting and network design, installation and deployment, maintenance support, and training services. Company description from FinViz.com.

Ciena reported earnings of 51 cents that beat estimates of 49 cents. Revenue rose 9% to $728.7 million and beat estimates for $726.9 million. Gross margins were 45% with an 11.3% operating margin. They ended the quarter with $854.1 million in cash and generated free cash flow of more than $50 million. Shares were knocked for a 15% loss on the news.

They guided for Q3 revenue of $720-$750 million and a record quarter. Analysts were expecting $766 million.

The CEO talked to a Barron's analyst after the earnings call and was very upbeat. He said we are still in bullish mode with 7% annual growth and 5% growth in North America. Compound growth over the last five years is 9%. The Q3 guidance takes into account two factors. Government spending overall has slowed. That means less spent on networking equipment. Secondly, Tier One telecom operators get a lot of government business and the slowing government spend has affected them as well. There has been a lot of regional M&A that is being digested. This impacts the entire networking market not just Ciena. We are still predicting 7% growth and a record quarter despite the temporary government slowdown.

Piper Jaffray reiterated an overweight rating saying they understood the government and regional provider problem and Ciena had a lot of positive signs despite this government slowdown. Ciena is executing well, new product acceptance is good. We believe Ciena is the best positioned system supplier for the two hottest segments of the optical market.

Citi upgraded from neutral to buy. Doughtery reiterated a buy and $27 price target.

Earnings Nov 30th.

Shares declined after earnings to support at $21.50 and rebounded 2% on Friday.

Update 9/7/17: Good article in Barron's on what Wall Street is missing about the Ciena outlook. Full Article

Position 9/5/17:

Long Nov $23 call @ 93 cents, see portfolio graphic for stop loss.

Previously closed 9/13: Long CIEN shares @ $21.89, exit $21.98, +.09 gain.

DF - Dean Foods - Company Profile


No specific news. Shares are still struggling but not moving lower.

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:

Long Dec $10 put @ 40 cents, see portfolio graphic for stop loss.

Previously closed 9/26: Short DF shares @ $11.02, exit $10.95, +.07 gain.

ECA - Encana Corporation - Company Profile


No specific news. RBC Capital reiterated an outperform on Monday. Macquarie upgraded from neutral to outperform on Thursday.

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.

Update 7/21/17: Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

Update 9/15/17: Bernstein turned bullish on ECA saying production should increase 26% in 2018 and 16% in 2019. The analyst said the Q3 earnings could be the potential catalyst for investors.

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.

ETSY - Etsy Inc - Company Profile


No specific news. Shares are still struggling with support and no clear break yet.

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 Dec $20 call @ 70 cents, see portfolio graphic for stop loss.

Previously closed 9/27: Long ETSY shares @ $17.79, exit $16.75, -1.04 loss.

GE - General Electric - Company Profile


We closed the position on Monday and shares began to decline again on Tuesday.

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 9/25: Long Dec $23 put @ 58 cents, exit .29, -.29 loss.

Previously closed: 9/19/17: Short GE shares @ $23.93, exit $24.46, -.53 loss.

HIMX - Himax - Company Profile


Susquehanna warned they see a semiconductor slowdown in progress. That crashed the stock early in the week. It also prompted ROTH Capital to reiterate a buy rating. Lake Street upgraded from a hold to a buy. Shares rebounded nicely and could be moving higher soon.

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 Dec $11 call @ $1.20, see portfolio graphic for stop loss.

Previously closed 9/25/17: Long HIMX shares @ $10.31, exit $9.65, -.66 loss.

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