Option Investor

Daily Newsletter, Tuesday, 1/16/2018

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The markets tripped after opening at news highs and performed an embarrassing face plant.

Market Statistics

The Dow gapped open this morning to 26,086 (+282 points) and almost 100 points over the 26,000 level. That excitement lasted until about 10:00 when sellers appeared. The index fell -383 points from its intraday high to the intraday low but finally found some traction to close almost flat. That was a whopping -1.5% decline intraday. The Nasdaq fell -107 from its high. The Dow Transports fell -253 points before rebounding slightly to close with a -146 loss. The Biotech Index fell -151 points before rebounding to close down -98. It was not a good day in the market but it could have been worse. The Dow almost rebounded to positive territory and damage to the big cap indexes at the close was minimal.

Boeing was the biggest gainer at the open with an $11.52 spike that added 76 Dow points. When Boeing rolled over to drop -$16.40 from its highs it erased -108 Dow points. I have remarked several times that once Boeing's rocket ride ends, the Dow is going to pay the price.

Helping to lift the Dow at the open was earnings from UnitedHealth (UNH) and Citigroup (C). UNH reported earnings of $2.59 ($3.62 billion) compared to estimates for $2.50. Revenue of $52.06 billion beat estimates for $51.52 billion. For the full year of 2018, UNH guided for earnings of $12.30-$12.60. That is up from prior guidance of $10.55-$10.85. Analysts were expecting $11.47 for 2018. In addition to the regular earnings above, they posted a $1.22 gain related to an adjustment of their net tax-deferred liability as a result of tax reform. The company projected cash flow from operations of $15.0-$15.5 billion.

Total enrollment rose from 48.59 million to 49.05 million. Commercial policy enrollment rose from 29.87 million to 30.58 million. Medicaid and Medicare enrollment rose from 13.79 million to 15.58 million. The company's effective tax rate over the past five quarters was 40% according to Morgan Stanley. MS is projecting an earnings increase in 2018 of $1.80 per share as the result of taxes. UNH has beaten earnings for nine consecutive quarters.

Citigroup (C) reported adjusted earnings of $1.28 that beat estimates for $1.19. Revenue rose 1% to $17.3 billion. GAAP results were a loss of $7.15 because of a $19 billion charge for deferred taxes under the new tax reform plan. Citi had previously estimated it at $20 billion. They also took a $3 billion charge for foreign earnings it will repatriate to the US. Even after the charges, Citi will have $21 billion in tax credits remaining on its balance sheet. They expect their effective tax rate in 2018 to be 25% and then decline in 2019.

If you exclude all of those non-cash numbers Citi earned $3.7 billion in Q4. Because of the lower tax rate, they are still on plan to return $60 billion to shareholders over the next three years.

Shares were up slightly after the report. Citi is not an investor favorite but the stock has been rising steadily.

Comerica (CMA) reported earnings of $1.28 that rose 28% and beat estimates for $1.21. Their net interest income rose 19.8% to $545 million. They took a non-cash charge of $107 million to adjust their deferred taxes under the new law. Revenue of $830 million beat estimates for $819.6 million.

After the bell, Boeing and Adient (ADNT) announced a joint venture to build airplane seats. Boeing said passenger seats have been a persistent challenge for customers through the years and they were partnering with Adient to resolve these problems and help address constraints in the market. The seats will be available for new planes as well as retrofit into older planes. Adient is primarily a seat maker for automobiles. The joint venture plant will be located in Frankfort Germany. Adient will have 50.1% stake and Boeing 49.9%. Adient shares were highly volatile and closed down $2 in afterhours.

CSX Corp (CSX) reported adjusted earnings of 64 cents that beat estimates for 56 cents. Revenue of $2.86 billion missed estimates for $2.88 billion. The company reported a $3.6 billion tax reform benefit and a $10 million restructuring charge. Shares closed down about 65 cents in afterhours. The company is struggling in its current restructuring program. The prior CEO that began the program died unexpectedly only 8 months into it. Investors are unsure how the new CEO, Jim Foote, will complete the plan. They have admitted they lost some customers because of the change to a tighter regular schedule rather than operating around the schedule of their major shippers. Rail yard closures have triggered persistent service disruptions. Foote has a big task by taking over in the middle of an unpopular program.

Juno Therapeutics (JUNO), which was a position in OIN until today, broke support intraday and stopped us out. After the bell, a story broke that Celgene (CELG) was in talks to acquire them. Shares rebounded $20 in afterhours. Both companies have partnered on cancer treatments in the past and it would be natural for them to merge. They are both working on CAR-T drugs that teach the immune system how to fight cancer cells. Recently Gilead Sciences (GILD) paid $12 billion for Kite Pharma to get their CAR_T technology. I need a drug for depression after bring stopped out.

Interactive Brokers (IBKR) reported earnings of 43 cents that rose almost 500% with revenue doubling to $515 million. Estimates were for 39 cents and $399 million. Customer accounts rose 25% to 483,000 and customer equity rose 46% to $124.8 billion. Great earnings but shares fell $2 in afterhours.

There were no economic reports of note on Tuesday.

The NY Empire Manufacturing Survey for January came in at 17.7, down just slightly from 18.0 but it was the lowest reading since July. New orders declined from 19.0 to 11.9 but backorders rose from -8.7 to +4.3. Employment took a significant hit from 22.9 down to 3.8. This report is showing seasonal issues and it was ignored.

Tomorrow has a full slate of events with the Fed Beige book the most watched. For the rest of the week there is nothing that is expected to move the market.

The potential government shutdown on Friday is the biggest hurdle. With both sides digging in behind their verbal fortifications and appearing to be moving farther apart than closer together, the odds of a shutdown are growing. The other option is another continuing resolution to kick the can down the road into February and buy them another month of time to try and whittle away at the demands from the other side.

Earnings on deck for Wednesday include Bank of America, US Bank, Goldman Sachs, Schwab and Alcoa. Goldman could provide the most volatility as a Dow component.

Bitcoin fell off a cliff today with the price dropping from $14,000 to almost $10,000 intraday. Those with dollar signs in their eyes back at $19,000 are probably having a rough day if they have not yet sold.

There is always hope. Kay Van-Peterson, an analyst at Saxo Bank, initially projected bitcoin to reach $2,000 in 2017. At the time, it was $900. She turned out to be spectacularly right. Today she said bitcoin could rise to between $50,000 and $100,000 in 2018. Hey, she won the lotto once and now she is going for the Powerball jackpot. She said 50% pullbacks are healthy because it creates additional buying from people that are not traders and will hold for a longer-term investment. At the end of her piece, she did qualify her targets saying it could take ten years for it to reach $100,000. She is not alone. Julian Hosp, co-founder of TenX is projecting $60,000 in 2018 but said it would have to crash first. Dave Chapman, managing director of Octagon Strategy, a coin-trading firm, said bitcoin actually could hit $100,000 in 2018. There are definitely a lot of opinions from zero to $100,000 and I am projecting a price somewhere in between. I think I am safe in my bet.


It was not just the major indexes selling off today. There was confirmation of growing market weakness in a couple of other sub indexes. The Dow Transports ($TRAN) touched a new high intraday but then crashed to lose -147 for the day. The Dow Transports are seen as a leading indicator for the Dow Industrials. For the transports to decline so sharply is a warning sign. However, they were significantly over extended and they were due for a rest. The question is where that rest will end.

The Biotech Index ($BTK) closed at a new high on Friday and lost -98 points or -2.2% on Tuesday. The JP Morgan Healthcare Conference is over and that could have taken some of the buyers out of the market. However, the biotechs are a major component of the Nasdaq and the Russell and a continued correction in that sector is going to weigh heavily on those indexes. This is another canary in the coalmine to watch for the rest of the week.

The S&P hit 2,807 at the open before falling 39 points to the low of the day. The rebound only recovered 8 of those points. This was far from bullish. The low from Friday was 2,769 and the index hit that level at the lows today. That is the red line indicator for a reversal. If the S&P closes below Friday's low, there could be stronger selling ahead. Support should be in the 2,750 range followed by 2,700.

The Dow fell -383 points intraday from the high to the low before recovering slightly to end just barely negative. If the Dow declines further it should find support at the prior uptrend resistance, which is about 25,500 for the next couple days. The index remains very overbought and is at risk. That does not mean it cannot go higher. We are living on borrowed time and it is eventually going to experience some profit taking.

I wrote over the weekend that I expected the real selling to appear in expiration week in February. I also wrote that we could see some stagnation of the current gains because the index is so overbought. We may not go significantly lower until after the majority of the S&P report earnings but we may not go significantly higher either.

The Nasdaq is also overbought and that should come as no surprise to anyone. However, the Nasdaq has a history of regular declines for profit taking every 2-3 weeks for the last six months. It is due since it has been up for two weeks as of today. I wrote over the weekend I would not be surprised if the decline did not come for two more weeks until after the major big cap tech stocks reported earnings. Investors are always eager to hold those stocks in the graphic below in hopes of a big post earnings blowout. Time will tell if that is the right strategy this quarter.

The Russell 2000 posted the largest percentage decline at -1.2% and that is probably related to the drop in the biotech sector. The index has failed twice at the uptrend resistance and I doubt we are going to just surge through that level this week. Support is 1,550 and prior resistance.

The futures have been down sharply and up sharply in afterhours and now they are just slightly positive. I see no reason to rush into the market. The decline in individual stocks was not enough to create any bargains and the option premiums have inflated because of the volatility. I would recommend buying a real dip if one appears. Until then it is a game to be watched from the sidelines. I never recommend buying new high breakouts on the market. That is a fool's errand in most cases. Today's spectacular reversal is a red flag until proven otherwise.

The pending government shutdown could give us a new entry point if it occurs. A can kick down the road could relieve the cloud over the market until after earnings and that would be positive in the short term.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Testing Bullish Conviction

by Jim Brown

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Editor's Note

Tuesday's intraday reversal is a test of bullish conviction. Let's pass. The futures have been down sharply and up sharply in afterhours and now they are just slightly positive. I see no reason to rush into the market. The decline in individual stocks was not enough to create any bargains and the option premiums have inflated because of the volatility. Today's spectacular reversal is a red flag warning until proven otherwise. .


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Trouble in Paradise?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The bullish market open quickly deteriorated in to a bearish implosion. The Dow declined -383 points from its intraday high and the Nasdaq fell -107 from its high. The Russell declined -19 points and the biggest percentage decline of the major indexes. The biotch sector fell more than -2% and the Transports -1.3%. These are leading indicators for the broader market.

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

ALDR - Alder BioPharma
The long position was entered at the open.

CHGG - Chegg Inc
The long stock position was stopped at $16.45.

AOBC - American Outdoor Brands
The short position was stopped at $12.35.

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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BULLISH Play Updates

ALDR - Alder BioPharmaceuticals - Company Profile


No specific news. Shares down with the market. Support at $16.50 needs to hold.

Original Trade Description: January 13th.

Alder BioPharmaceuticals, Inc., a clinical-stage biopharmaceutical company, discovers, develops, and commercializes therapeutic antibodies in the United States, Australia, and Ireland. The company??s lead product candidate includes ALD403, an antibody, which is in Phase II clinical trial to target calcitonin gene-related peptide for the prevention of migraine. It also develops ALD1910, a genetically engineered monoclonal antibody that is in preclinical study for the treatment of migraine; and Clazakizumab, an antibody, which has been completed Phase IIb clinical trial that inhibits the pro-inflammatory cytokine interleukin-6 for the treatment of rheumatoid and psoriatic arthritis. In addition, the company has preclinical programs in the discovery phase for various indications. Alder BioPharmaceuticals, Inc. was incorporated in 2002 and is headquartered in Bothell, Washington. Company description from FinViz.com.

Alder just reported phase III results for Eptinezumab for the treatment of migraines. The patients had an average of 16 migraine episodes per month. After treatment with Eptinezumab, migraines decreased 50% on day one and 15% of the patients reported zero incidents for the entire 12 weeks of the trial. While the endpoint of eliminating migraines for everyone was not met, everyone did receive relief while some were cured. This means the drug will be approved and could become very profitable.

In addition, Alder settled its patent dispute with Teva over the drug in an EU patent case. Under the terms of the settlement Alder will withdraw its appeal, make a one time payment of $25 million to Teva. They will make a second $25 million payment on approval of a biologics license application for the drug. Following the commercial launch of the drug they will pay an additional $75 million when sales reach $1 billion and another $75 million at the $2 billion level. They will also pay royalties to Teva of 5% to 7%. This also gives Alder access to Teva's patent portfolio and a clear path to commercialize the drug on a global basis.

The company has secured private financing of $250 million to fund the payments to Teva, the drug application process and the marketing effort to commercialize the drug.

Expected earnings Feb 6th.

Shares rallied sharply over the last two weeks and they have failed to sell off after their big gains. The stock closed 5 cents under a 6-month high on Friday.

Position 1/16/18:
Long ALDR shares @ $17.90, see portfolio graphic for stop loss.
Alternate position: Long Feb $20 call @ 80 cents, see portfolio graphic for stop loss.

We will hold the call over earnings then exit.

BB - Blackberry Ltd - Company Profile


BlackBerry launched a product called BlackBerry Jarvis. This is anti hacking software for self driving cars. Manufacturers can use it to scan their product before they are released to look for weak points that could be hacked. Tata Motors said the product allowed them to cut the analysis time down from 30 days to 7 minutes. Shares spiked at the open but fell back in the weak market.

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


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


No specific news. The company announced an earnings date of Feb 12th. Shares declined with the biotech sector to stop us out on the stock position. The long call will more to the Lottery Play section.

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:

Closed 1/16: Long CHGG shares @ $15.07, exit $16.45, +$1.38 gain.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. Down with the biotech sector.

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


No specific news. Down with the market.

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


No specific news. Down slightly with the biotech sector.

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


No specific news. YRCW had a good week but fell with the transportation sector today. If the market is in danger of rolling over, the transports could lead and they were down -146 today. I am recommending we close this position.

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.

Update 1/11: 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. 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


No specific news. There was just enough rebound today to stop us out on the stock position by 6 cents. The long put option will move to the Lottery Play section.

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:
Closed 1/16: Short AOBC shares @ $12.14, exit $12.35, -.21 loss.
Alternate position: Long March $10 put at 35 cents.
No stop loss and we will hold over earnings.

OHI - Omega Healthcare Investors - Company Profile


No specific news. Shares tried to rally in a bullish market but ended negative at a new low.

Original Trade Description: January 11th

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.

Position 1/12/18L
Long March $26 put @ 85 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


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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