Option Investor
Newsletter

Daily Newsletter, Thursday, 1/11/2018

Table of Contents

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

Market Wrap

Earnings And Outlook Drive Market Higher

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The major indices surged to new all time highs on better than expected earnings, tax reform and expanding growth in 2018. Today's news was good to say the least; earnings are coming in above expectations, more signs of tax-reform-induced economic have emerged and forward outlook continues to improve.

Asian indices held steady in overnight trading as market watchers had their eyes on today's earnings announcements and fall-out from yesterday's bond-purchase news. Chinese officials came out to say news China would suspend purchase of US treasuries was incorrect, came from unofficial sources and classified as "fake". Chinese indices led with gains near 0.11% while Korea lagged with losses near -0.5%.

European indices were also mixed despite positive data, reassurance from the ECB and rally in the US. Today's EU data included industrial production figures which rose more than expected in the month of December and for all of 2017. The headline YOY figure of 3.2% was 0.2% better than expected and underpinned key points of the ECB minutes, also released today. The minutes show the bank is well aware of economic improvement within the bloc and will be ready to readdress their policy message in the near future. The FTSE led with gains of 0.2% while the DAX lagged with losses near -0.60%.

Market Statistics

Futures trading was flattish but positive all morning, gaining a little strength going into the open. The SPX was indicated to open with gains near 0.2% and did so. The index then began working its way higher until hitting a peak just after 10AM and then dipping down to test for support. Support was found at the opening level resulting in a bounce that carried the index back up to test the early high and move on to set new ones. Another peak was hit around 1:30PM resulting in sideways trading at new all time highs that carried into the late afternoon.

Economic Calendar

The Economy

The Producer Price Index shrank unexpectedly by 0.1%, analysts had been expecting expansion to slow to 0.2% from the previous month's 0.4%. Despite the drop producer level inflation remains moderate at 2.6% and above the Fed's 2% target. On a core basis, ex-food & energy, PPI rose by 0.1% but was still weaker than expected. YOY core PPI is running at 2.3% and also above the Fed's target rate. The news both supports the FOMC's current time line, it does not suggest surprise hiking at next week's meeting.


Initial claims for unemployment rose by 11,000 to hit 261,000, last week's figure was not revised. The 4 week moving average of claims gained 9,000 to hit 250,750. On a not adjusted basis claims rose by 14.7% versus an expected 10.0% but are lower than last year. On a year over year basis claims are down -2.8% and consistent with ongoing labor market health.


Continuing claims fell by -35,000 to hit 1.867 and the lowest level for this figure since 12/29/73 (after revisions). The last week's figure was revised lower by -12,000. The four week moving average of claims fell by -5,500 and continues to trend near the long term historic lows, consistent with ongoing labor market health.

The total number of Americans receiving unemployment assistance jumped 82,330 to hit 2.101 million and the highest it has been since early last year. This spike is seasonally expected and lower than last year at this time, consistent with ongoing labor market improvement. Looking forward this figure should top out within the next 2 weeks and then begin falling as we approach the spring hiring season.


The Dollar Index

The dollar fell hard on the combination of ECB minutes/Industrial Production and our own weaker than expected PPI data. The dollar index created a long red candle moving back down to support at the $91.50 level. The index is indicated lower and may move down to the bottom of the short term trading range near $91.00 if tomorrow's CPI data is not as expected. Current estimates are for consumer level inflation to rise by 0.2% and expanding from the November read of 0.1%. Regardless the data the index is likely to remain within its range until next week's FOMC meeting if not longer.


The Gold Index

Spot gold got a boost from today's weakness in the dollar but the move was capped near $1,325 and the recent highs. The metal could continue higher, especially if tomorrow's CPI is weak, with a possible upside target of $1,350. Longer term I expect the metal to remain range bound as the global recovery continues.

The Gold Miners ETF GDX moved up along with gold but the move was small and not supported by the indicators. Today's candle is small and green and very near the mid-point of the long term trading range, not really a surprise with the FOMC meeting just next week. The indicators are a little mixed but generally consistent with range bound trading and test of support/move lower within that range. Support is currently at the pair of moving averages which, coincidentally, are on the verge of forming a crossover. A bounce from support would be bullish within the range, a break through would be bearish. Upper targets for resistance are $24 and $25, lower targets for support are $22.50, $22 and $21.


The Oil Index

Oil prices surged another 1% in today's trading and hit another new multiyear high. The move was driven by signs of increasing demand and supported by OPEC's production cut but the gains were not held. Prices jumped above $64 only to hit resistance and fall back to create a pin bar doji that indicates a pause or correction within the rally. Looking forward I am still expecting oil prices to correct back to bear market territory by the end of the year. Global production and capacity (don't forget OPEC could pump more if they wanted to) is expected to keep markets well supplied throughout the year.

The Oil Index surged on today's oil price gains, gains that are fueling the fire of forward earnings expectations, and set a new multiyear high. The index is on its way up to test the 3 year highs near 1,450 and could easily hit them in the next few weeks. The indicators are bullish and ticking higher in support of the move although longer outlook is cloudy. If/when oil prices begin to fall back gains in the sector could be capped.


In The News, Story Stocks and Earnings

Lots of news today and all of it good that I am aware of. On the one hand there were numerous reports of tax-reform driven pay increases and bonuses, on the other earnings are beating expectations. Today's biggest story in earnings was Delta Airlines. The company beat on the top and bottom lines and delivered positive results in all of its operating segments for the first time in years. Revenue grew by 8.4% YOY and beat by $90 million, driving earnings of $0.96 which beat by $0.06. Along with this is an increase to full year 2018 guidance that sent shared up by more than 2% in the post market session. The company is expecting 4-6% revenue growth this year.


Wal Mart announced a number of market moving new bites this morning starting with wage increases. The company says that because of tax reform it will raise its minimum starting wage to $11 and give all employees a bonus based on years in service. The largest bonus is $1,000 and given to those employees with 20 or more years employment with the company. Wal Mart also says it will be closing 10% of its Sam's Club stores and converting about 10 of them into ecommerce facilities. Shares of WMT fell on the news but found support at the short term moving average.


KB Homes reported after the bell and saw big gains today. The company says it expects solid demand in 2018 will drive revenue and earnings through the end of the year. The company has reported solid increases in traffic, sales, pricing and back logs that will keep it busy for at least the next few quarters. Shares of the stock gapped up by 5% at the open and then extended those gains to 12% by the close. Today's move is a strong move up to highs not seen since the Housing Bubble burst and is supported by the indicators.


The Indices

The indices moved higher in today's session. The move was driven on evidence tax reform will help more than just corporate shareholders, and that earnings growth is indeed expanding. Today's leader is the Dow Jones Transportation Average with a gain of 2.3%. The transports created a long green candle moving up from the 11,000 level and extending a rally that has now added more than 23% to the index in under 2 months. The move is supported by the indicators which are both bullish and pointing higher. Upside targets are as high as 13,000 in the near to short term.


The Dow Jones Industrial comes in second with a gain of 0.81%. The blue chip index created a medium sized green candle moving up from a very small consolidation move to set a new all time high. The move is supported by both indicators which are bullish and pointing higher, consistent with higher prices. Upside target is 2,600 in the near term.


The NASDAQ Composite tied for 2nd with a gain of 0.81%. The tech heavy index created a medium sized green candle moving up from a very near term consolidation to set a new all time high. The move is supported by the indicators which are both bullish and pointing higher in support of higher prices. Upside target is 7,500 in the near term.


The broad market S&P 500 brings up the rear with a gain of 19 points or 0.70%. The index created a medium sized green candle moving up from Tuesday's low to close at the high of the day and set a new all time high. The move is in line with the prevailing trend, supported by the indicators and likely to continue higher. Both MACD and stochastic are bullish and pointing higher in support of higher prices. The near term target is 2,800 but could easily be exceeded if conditions persist as they are.


The markets are still moving higher, are still setting new all times and still supported by forward outlook. Now they are also being driven by expanding outlook and signs tax reform will spur the economy as Trump and his cronies have said it would. The risk now is that earnings season will not continue as it started but I don't think that will happen. Tomorrow's big reports will be JP Morgan, Wells Fargo and Citigroup. I think there is a good chance for a big positive surprise. I am bullish.

Until then, remember the trend!

Thomas Hughes


New Plays

Credit Slippage

by Jim Brown

Click here to email Jim Brown
Editor's Note

The 2017 holiday shopping season was very strong for several retailers. The sector is rebounding on high expectations ahead of earnings.

Despite the Russell rally today, I am having a very tough time finding long positions. I spent several hours today trying to find long play without any success. All the charts are either crap or they look like this and I am not going to recommend these stock rockets.




NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

OHI - Omega Healthcare Investors - Company Profile

Omega Healthcare Investors, Inc. is a real estate investment firm. The firm invests in the real estate markets of United States. It invests in healthcare facilities, primarily in long-term healthcare facilities in order to create its portfolio. Omega is a real estate investment trust investing in and providing financing to the long-term care industry. As of September 30, 2017, Omega has a portfolio of investments that includes approximately 1,000 properties located in 42 states and the United Kingdom and operated by 77 different operators. Omega Healthcare Investors, Inc. was founded in 1992 and is based in Maryland, United States. Company description from Omega.

When Omega reported Q3 earnings, they also reported that two of their 77 operators (lessees) had fallen behind on their rents. The company had to record a charge of $194.7 million in non-cash impairment charges. The problem is that companies that far behind in their rent are not likely to suddenly catch up and send in a check for the past due. It typically suggests a longer term problem that could be terminal for those companies.

Funds from operations (FFO) were 79 cents and -4.8% below the year ago quarter. The company did raise their dividend to 65 cents for the 21st consecutive quarter. However, with massive delinquencies, that dividend could be in trouble. Shares plunged on the news and actually spiked the yield to 9.1% but you never want to be invested in a rising yield stock because the stock itself is declining. Investors appear to be heading elsewhere rather than risk a loss of capital.

Expected earnings Feb 7th.

Shares closed at a five year low on Thursday. If a stock cannot rally in this market, it is definitely sick.

I am going to recommend this as an option only position. Because this is a bull market we could see a sudden rebound in OHI as a "value" play because of its decline.

Buy March $26 put, currently 95 cents, initial stop loss $27.65.



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

Small Cap Blowout!

by Jim Brown

Click here to email Jim Brown

Editors Note:

Small caps exploded higher with the Russell posting a 1.73% move. After three weeks or minor moves the Russell caught fire and exploded over resistance with a major 27 point gain. Transports, semiconductors, banks and tech stocks in general helped with the rally. I am sure a lot of squeezed shorts were also pushing prices higher. This market refuses to rest with the Dow gaining 205, Nasdaq 58 and the S&P 19 points.





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


JCP - JC Penny
The long position was entered at the open.

YRCW - YRC Worldwide
The long call position was closed 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

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Iron Condors = Couch Potato Trader



BULLISH Play Updates

BB - Blackberry Ltd - Company Profile

Comments:

No specific news. Shares still declining. We have an insurance put that will allow us to hold it through some volatility.

Original Trade Description: January 8th.

BlackBerry Limited operates as security software and services company in securing, connecting, and mobilizing enterprises worldwide. The company operates in three segments: Software & Services, Mobility Solutions, and Service Access Fees (SAF). The Software & Services segment offers enterprise software and services, including mobile-first security, productivity, collaboration, and end-point management solutions for the Enterprise of Things through the BlackBerry Secure platform; BlackBerry technology solutions, such as BlackBerry QNX, Certicom, Paratek, BlackBerry Radar, and intellectual property and licensing; AtHoc, which provides secure, networked crisis communications solutions; SecuSmart that offers secure voice and text messaging solutions with encryption and anti-eavesdropping facilities; licensing and services related to BlackBerry Messenger; and cybersecurity consulting services and tools. The Mobility Solutions segment engages in the development and licensing of secure device software and the outsourcing to partners of design, manufacturing, sales, and customer support for BlackBerry-branded handsets. This segment also develops software updates for its legacy BlackBerry 10 platform, and delivers BlackBerry productivity applications to Android smartphone users via the Google Play store; and sells its DTEK60, DTEK50, Priv, Leap, and Passport smartphones and smartphone accessories, as well as offers non-warranty repair services. The SAF segment consists of operations related to subscribers using mobile devices with its legacy BlackBerry 7 and prior operating systems. The company was formerly known as Research In Motion Limited and changed its name to BlackBerry Limited in July 2013. BlackBerry Limited was founded in 1984 and is headquartered in Waterloo, Canada. Company description from FinViz.com

Expected earnings March 21st.

BlackBerry started out as a smartphone manufacturer under the name Research in Motion (RIMM). Over the years they failed to keep pace with Apple and Android and the BlackBerry phones are now just a niche market and they contract with another company to have them made.

BlackBerry has evolved into a software and services company with security software, mobility solutions, and dozens of other categories. The company is now the largest provider of automobile operating systems with tens of millions of cars using their QNX software.

They are using their experience in auto OS to build the next generation of autonomous vehicles. They announced last week that Baidu had chosen them to help develop self-driving technology. Baidu said "by integrating the QNX OS with the Apollo platform, we will enable carmakers to leap from prototype to production systems." BlackBerry radar, an asset tracking solution, is already available at more than 2,800 heavy-duty truck dealerships across North America. This software and equipment tracks trucks, loads, trailers, containers, heavy machinery and other transportation assets. Trucking companies and shippers can track the location of their cargo and vehicles in real time all the time.

Last week they reported earnings of 3 cents that beat estimates for a breakeven quarter. Revenues of $226 million beat estimates for $212 million. The company guided for the full year for revenue of $920-$950 million with software revenue up as much as 15%. This was the second quarter of positive earnings surprises after a long drought of weak results. The company promised positive EPS and cash flow for the future.

There are rumors in the market that BlackBerry could suddenly become an acquisition target because of their small size of $8 billion market cap and vast array of growing software services. Shares spiked to a new 4-year high on the earnings and guidance and the stock is suddenly hot once again. This is not some new fad company. There is history and there is a remarkable turnaround in progress.

I am going out to June with the option to get past the March earnings. There is likely to be some profit taking from the recent gains, so we need to buy some time.

I am going to recommend the stock but I am adding a March put, just in case the rebound fails. I fully expect the stock to be significantly higher a couple months from now but I am recommending a 50 cent insurance policy.

Position 1/9/18:
Long BB shares @ $14.22, see portfolio graphic for stop loss.
Long Mar $13 put @ 50 cents, see portfolio graphic for stop loss.

Alternate position: Long June $15 call @ $1.30, see portfolio graphic for stop loss.



BOTZ - Global X Robotics AI - Company Profile

Comments:

Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.



CHGG - Chegg Inc - Company Profile

Comments:

No specific news. New closing high.

Original Trade Description: November 27th

Chegg, Inc. operates student-first connected learning platform that help students transition from high school to college to career. The company's products and services help students to study for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. It offers print textbook and eTextbook library for rent and sale; and provides eTextbooks, supplemental materials, Chegg Study service, tutoring service, writing tools, textbook buyback, test preparation service, internships, and college admissions and scholarship services, as well as enrollment marketing and brand advertising services. The company has a strategic alliance with Ingram Content Group Inc. Chegg, Inc. was founded in 2005. Company description from FinViz.com.

Expected earnings Jan 29th.

The company reported Q3 earnings of 1 cent, up from a loss of 3 cents and beat earnings for a loss of 1 cent. Those are not big numbers but the company is investing for the future. Revenue of $62.6 million beat estimates for $57.7 million. The company guided for the full year for revenue of $251-$252 million, up from prior guidance of $241-$243 million.

The company just acquired Cogeon GmbH, a provider of AI driven adaptive math technology and the math app, Math42.com. With access to new original content, they can launch their own math courses to provide self-guided and individualized solutions to more students. This will increase their market share in the high school market. The company is growing at a 26% annual rate.

The company said recent studies showed 64% of high school graduates were not prepared for college level math courses. Some 40% of college freshmen have to take at least one remedial math course.

Citigroup just initiated coverage with a buy rating. With Chegg's 4% penetration into a very large addressable market, there is plenty of room to grow. The analyst said Chegg's business model is a positive feedback loop that aids in new subscriber acquisition and cross-selling. They have a pipeline of new products aimed at expanding the addressable market.

Shares declined after earnings but are rebounding from the post earnings depression.

Position 11/28/17:

Long CHGG shares @ $15.07, see portfolio graphic for stop loss.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.



IMMU - Immunomedics Inc - Company Profile

Comments:

IMMU is working with Univ of Wisconsin to expand Sacituzumab Govitecan into a prostate cancer treatment.

Original Trade Description: December 23rd.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, focuses on the development of monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders, and other diseases. The company engages in developing antibody-drug conjugate (ADC) products comprising IMMU-132, an ADC that contains SN-38, which is in Phase II trials used for the treatment of patients with metastatic triple-negative breast cancer, and small-cell and non-small-cell lung cancers; IMMU-130, an anti-CEACAN5-SN-38 ADC that is in Phase II trials for the treatment of solid tumors and metastatic colorectal cancer; and IMMU-140 that targets HLA-DR for the potential treatment of liquid cancers. It also develops products for the treatment of cancer and autoimmune diseases, including epratuzumab, anti-CD22 antibody; veltuzumab, anti-CD20 antibody; milatuzumab, anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. The company also provides LeukoScan, a diagnostic imaging product to determine the location and extent of infection/inflammation in bone. In addition, it offers other product candidates for the treatment of solid tumors and hematologic malignancies, as well as other diseases, which are in various stages of clinical and pre-clinical development. The company has a research collaboration with The Bayer Group to study epratuzumab as a thorium-227-labeled antibody. Immunomedics, Inc. was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics recently announced a blinded trial on breast cancer drug sacituzumab govitecan showed positive results. The drug is an anti-TROP-2 antibody that can target multiple tumor types including breast cancer, lung cancer and colorectal cancers. This would be a holy grail of cancer treatment if the drug continues to post solid results. The drug is being tested to treat triple negative breast cancer, a tough-to-treat indication with limited treatment options. These cases represent 15% of the 246,660 new cases of breast cancer reported each year resulting in 40,450 deaths per year. In the recent trial the "objective response rate" or ORR was 31% or nearly double the historical rate for the standard treatment of these patients. The company plans to file for an accelerated FDA approval in early 2018. An independent study of this drug by an outside firm estimated it could produce $3 billion in annual sales by 2025.

Obviously, there is no guarantee the drug will be approved or be successful in the real world but the outlook is promising and it is lifting the stock price. Shares broke out to a new 15-year high on Friday and could continue to make new highs as long as the research on this drug and others continues to be positive. Seattle Genetics (SGEN) owns 7.3% of the company and executed warrants to acquire 8.6 million shares on December 5th for $42.4 million. They obviously believe the drug has potential.

Hopefully the potential for a blockbuster drug will insulate us from any market negativity in January.

Update 1/8/18: Royalty Pharma bought $75 million of IMMU shares at $17.15 per share, 15% over the current price. They also paid $175 million for the rights to market Sacituzumab Govitecan (IMMU-132) on a global basis. They will pay a royalty of 4.15% on a step down basis until sales reach $6 billion annually then the rate will be 1.75%. The $250 million in cash will allow IMMU to fund its next phase of growth with expenses covered well into 2020. Shares declined slightly since the stock sale added to the shares outstanding.

Position 12/26/17:

Long IMMU shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $16 call @ $1.15, see portfolio graphic for stop loss.



JCP - JC Penny Company - Company Profile

Comments:

No specific news. Shares posted a minor gain but it was a 3-month high close.

Original Trade Description: January 10th.

J. C. Penney Company, Inc., through its subsidiary J. C. Penney Corporation, Inc., sells merchandise through department stores. The company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, home furnishings, and appliances, as well as provides various services, including styling salon, optical, portrait photography, and custom decorating. As of November 10, 2017, it operated approximately 874 department stores in the United States and Puerto Rico. The company also sells its products through its Website, jcpenney.com. J. C. Penney Company, Inc. was founded in 1902 and is based in Plano, Texas. Company description from FinViz.com.

This is going to be a short play description. JCP had been left for dead as the next retailer to disappear after Sears because they are both anchor tenants in dying malls across America. A funny thing happened on the way to bankruptcy court. JCP actually began to recover.

The company raised guidance last week saying same store sales rose 3.4% thanks to strong demand for home goods, beauty products and jewelry. The company said their ecommerce sales rose double digits. They reaffirmed their full year earnings forecast and the CFO warned Sears, "we are coming after your appliance business." That is pretty cocky and suggests JCP is a long way from dead.

Expected earnings Feb 9th.

Shares are suddenly recovering and the outlook has improved significantly.

The best thing about this position is that the May option is very cheap since investors have not really caught on to the recovery yet. We can slip in and take a position and hold the option over earnings and we could have a big long term winner.

Position 1/11/18:
Long JCP shares @ $3.97, see portfolio graphic for stop loss.
Alternate position: Long May $4 call @ 60 cents, see portfolio graphic for stop loss.



TEVA - Teva Pharmaceutical - Company Profile

Comments:

No specific news. Nice $1.70 gain!

Original Trade Description: January 6th.

Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com

Expected earnings Feb 1st.

Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.

Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO, Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. In early December the stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.

Teva announced in mid December they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse after the restructuring news.

Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.

I believe the worst is over. The reaction to the news over the last four months has been horrendous. Shares had fallen from $32 to $10. Since the new CEO took control, they have rebounded back to $19.

The rebound from the restructuring news lifted Teva back to $19 and just below current resistance. Thursday closed at a 5 month high but Friday saw a slight fade. I expect Teva shares to break through the current resistance and begin to recapture some of their losses.

Update 1/8: Teva announced an agreement with Alder BioPharma in the field of anti-CGRP based therapy. This validated Teva's EU patent #1957106 B1 in relation to anti-calcitonin gene-related peptide (CGRP) antibodies and methods of use. Alder will receive an non-exclusive license to Teva's CGP portfolio and will manufacture and commercialize Eptinezumab globally. Alder will cancel its patent litigation and make a one-time payment of $25 million to Teva. A second $25 million payment will be made on approval of a BLA for that drug. Once the drug is marketed Alder will pay $75 million when sales reach $1 billion and $75 million when sales reach $2 billion annually. They will also pay royalty payments of 5% to 7% to Teva. This was a win for Teva.

Update 1/10: Teva said it had reached an agreement with employees regarding closing two plants in Israel. Workers had been protesting since the closures were announced to occur by the end of 2019. Teva made some concessions to the workers and they are returning to work on Thursday. The closures are part of a restructuring that will save Teva $3 billion a year in expenses, which are currently about $16.1 billion a year. In other news directors agreed to cut their compensation in half. Shares rallied 3.5%.

Position 1/8/17:
Long TEVA shares @ $19.31, see portfolio graphic for stop loss.
Alternate position: Long March $20 call @ $1.32, see portfolio graphic for stop loss.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. We closed the expiring Jan $15 call at the open because of the evaporating premium and YRCW surged 63 cents. We were a day early on that close but hindsight is always 20:20.

Original Trade Description: December 9th.

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

YRCW reported Q3 earnings of 22 cents that missed estimates for 28 cents. Revenue of $1.25 billion matched estimates. Shipments were impacted by the hurricanes in Texas and Florida. Shares traded sideways on the miss.

Regional shipments increased 4.0% despite the hurricane impact. Revenue per hundredweight ros 3.4% and revenue per shipment rose 3.8%. That was the highest revenue per hundredweight increase in more than 3 years. They are refreshing the fleet to more economic tractors and transitioning 8 terminals to become regional distribution centers. This will add capacity and reduce costs.

Expected earnings Feb 1st.

The entire transportation sector crashed in late October and early November and that knocked 25% of YRCW shares. The rebound started in mid November and shares have recovered all the loss and are close to a breakout to a new 52-week high.

Update 12/11: After the bell, YRC provided an operational update for November. Tonnage per day increased 1.1%, revenue per hundredweight rose 3.7%. Revenue per shipment rose 5.0%. Regional tonnage per day rose 6.0%, revenue per hundredweight rse 0.8% and revenue per shipment rose 4.1%. Overall these were some good numbers.

Position 12/11/17:

Long YRCW shares @ $14.20, see portfolio graphic for stop loss.
Alternate position:
Closed 1/11: Long Jan $15 call @ 71 cents, exit .55, -.16 loss.




BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news. Shares are rebounding on the general bullish sentiment about retailers.

Original Trade Description: December 30th.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

AOBC is a great company but times have changed. Under the 8-years of Barack Obama as president the firearms sector boomed because Obama never missed a chance to blame firearms for every act of violence rather than the criminal acts of the violent offenders. He had said numerous times he would ban firearms if he could and enacted policies that pressured gun dealers including limiting their access to banking. With a potential new gun control law behind every event, gun sales boomed to all time records. In the last year of his presidency he bragged several times that he had become the best gun salesman ever.

President Trump is pro gun and there are multiple pro gun laws making their way through congress. There is no fear of any gun bans even after the Las Vegas shooting. With no urgency to buy new guns, sales are falling. AOBC said rising inventories were a problem and they are being forced to reduce production.

Earnings March 8th.

Investors looking for promising stocks for 2018 with rising revenue and earnings, will likely avoid AOBC because they have neither. In their Q3 earnings report, revenue declined -36% to $148.4 million and earnings fell -90% from $32.5 million to $3.2 million. With 3 years left in Trump's term, the outlook for rising sales is weak at best.

They guided for 2018 for earnings of 57-67 cents and will include write downs of acquired assets.

Update 1/4/18: Firearms background checks fell -8.4% in 2017, the first year over year decline in 15 years. Checks rose from 8.45 million in 2002 to 27.54 million in 2016. AOBC has to deal with this sharp decline in volume.

Position 1/4/18:
Short AOBC shares @ $12.14, see portfolio graphic for stop loss.
Alternate position: Long March $10 put at 35 cents.
No stop loss and we will hold over earnings.



VXX - Volatility Index Futures - ETF Description

Comments:

Since this is a long-term slow moving ETF 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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