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Newsletter

Daily Newsletter, Saturday, 1/5/2019

Table of Contents

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

Market Wrap

Whiplash!

by Jim Brown

Click here to email Jim Brown

The massive reversal from the -660 drop on Thursday to a +747 spike on Friday should have the bears complaining of whiplash.

Weekly Statistics

Friday Statistics

The Apple disaster proved to be a one-day wonder and more than likely company specific rather than an overall symptom of a global economic decline. The rising bullishness since the post-Christmas dip was impacted severely by the knee jerk reaction from the Apple warning. When other companies that deal heavily in China said they were not seeing any weakness, the Apple impact on tech stocks began to fade.

Fed Chairman Powell poured fuel on an already hot market when he said in a speech that the Fed would be patient and flexible with future rate hikes and the unwinding of QE positions was NOT on autopilot and could be changed at any time if it appeared an adjustment was needed.

With Friday's speech Powell has cemented his reputation as a flip flopper. On October 3rd, the high in the market, a hawkish Powell said we are "a long way from neutral on rates." In November he was more dovish as the market was crashing. In December he was hawkish with the autopilot comment and tanked the market once again. Hopefully Friday's significantly dovish comments will last longer than a month before he morphs back into hawk mode.

In plain English, it appears the Fed and Powell has heard the message from the market and decided they do not want to be blamed for a bear market. It is easier to react calmly from a position of patience than be blamed for the next decade for killing the longest bull market on record.




At the end of this commentary is a VERY IMPORTANT MESSAGE: Please read.


Friday started with a blowout jobs report for December. Analysts were worried when November dipped to 155,000 new jobs from the 200K+ in prior months. They did not need to worry. December created 312,000 jobs and well over the 180,000 expected. This was the biggest monthly gain since February at 324,000 and it will probably be revised higher. November was revised higher from 155,000 to 176,000 and October was revised up from 237,000 to 274,000. That was a gain of 58,000 in the revisions of the prior two months. That lifted the average for the last eight months to +226,000 and very strong. For just Q4 the average was 254,000 per month.

The labor force participation rate rose 2 tenths from 62.9% to 63.1% because of the large number of people rejoining the workforce. The labor force rose by 419,000 for the month and the second largest gain since June. The unemployment rate rose from 3.7% to 3.9% because of the larger number of people looking for work. The strong jobs environment is raising wages, and this is drawing people off the couch and back into the job market. The average hourly earnings rose 0.4% and the largest gain in four months. Hourly earnings increased 11 cents for a YoY rise of 3.15% and a high for this economic cycle.

The manufacturing sector created 74,000 jobs and the service sector added 238,000 jobs. Government added 11,000 jobs. Education/Healthcare added 82,000 jobs, leisure/hospitality added 55,000.

More than 2.64 million jobs were created in 2018, up from 2.19 million in 2017. Monthly average job gains are expected to be 200,000 in 2019.

Normally a blowout payroll report would put fear of the Fed into the market. Given the recent market decline on worries about a slowing economy, this report was just what the doctor ordered to end those worries. Powell's comments later in the morning erased any lingering Fed fears.


Vehicle sales for December came in at 17.6 million annualized and that was slightly better than the 17.3 million analysts expected. It was also the highest rate since December 2017. Autos totaled 5.3 million and light trucks/SUVs 12.2 million. This is the fourth consecutive year over 17 million and the first time ever. Interest rates for new loans declined slightly to 5.9% in December.

Starting in 2019 GM and Ford will begin reporting data quarterly instead of monthly and there is little doubt that others will follow suit.

This was really a banner year because a significant number of sales were pulled forward into late 2017 by hurricanes Harvey and Irma. That made early year sales weak, but buyers came roaring back. Auto credit also retreated in early 2018 as banks began to have more delinquencies. That reversed later in the year and sales surged again. The tax cuts put more money in consumer pockets and they spent it. They bought trucks and SUVs because passenger cars as a percent of the total fell to 30% and a record low.

Moody's Vehicle Sales Chart

The weekly EIA oil inventory report was delayed until Friday by the holidays. Crude inventories were unchanged at 441.4 million barrels. Distillate inventories of jet fuel, heating oil and diesel rose 9.5 million barrels. We now know what refiners were producing in late December as they tried to deplete oil levels ahead of the property tax deadline on December 31st. Gasoline inventories also rose by 6.9 million barrels.

Prices rebounded to $48.31 after dipping to $42.36 the prior week. This was helped by news that Saudi Arabia planned a shocking drop in production to hasten the rebound to higher prices. OPEC production declined -460,000 bpd in December and the production cuts were not supposed to be effective until January. Saudi Arabia alone cut production by 400,000 bpd and is said to be cutting another 500,000 bpd in January. In keeping with a previously reported pledge to cut oil shipments to the US, we only imported 1.63 million bpd of OPEC oil in December. That is a 5-year low. The idea by OPEC is to force US inventory levels lower causing an increase in WTI prices.

Libya's Sharara field is struggling to restart after inspection teams reported the theft of key equipment including transformers and cables from numerous wells. Even after the field restarts this will cut production by up to 10,000 bpd until the equipment can be replaced. The 300,000-bpd field has been shut for a month due to militia attacks and threats.

The payroll report and the resumption of US/China trade talks next week also helped to lift prices on hopes demand will increase if the economy continues to be strong and a trade deal is completed with China. Having an extra 312,000 new jobs means every one of those workers will be using more oil in some form. That could be driving to work or increasing the demand on bus/train/subway transportation.

A recent survey of 24 oil analysts by Bloomberg found they believe Brent crude will average $70 for 2019. That puts WTI in the $61.50 range.

The drop in crude prices along with the holidays combined to cause a drop of 8 active rigs in the US. Oil rigs fell 8 to 877 and gas rigs were unchanged at 198.



Note how the refinery utilization rose in the last week in December as refiners tried to reduce oil inventories before the property tax deadline on December 31st.


The EIA Natural Gas inventory report showed a decline of only 20 Bcf for the week ended on 12/28. The weather is simply too mild for this time of year and gas prices are collapsing despite inventories being 18% below year ago levels and 19% below the 5-year average. In theory gas prices should be significantly higher given the low inventories. However, I live in the mountains in Colorado and we are approaching mid-January and we have not had to shovel snow even once this winter. Normally we would be doing it 1-2 times a week after Thanksgiving.



Tech stocks rebounded the most on Friday and I would bet CES 2019 had something to do with it. CES 2019 is the largest electronics show in the world and it starts next week. Nvidia will kick it off with a giant two-hour press conference on Sunday evening. It will be live streamed HERE This is always an interesting presentation and the equivalent of looking 10-years into the future of technology.

IBM has the keynote speech on Tuesday at 10:30 and they will update on the Red Hat purchase and the future for their improved cloud.

The AMD CEO will also present a keynote speech at 11:00 on Wednesday. Dr Lisa Su has completely restructured AMD and they are well ahead of Intel on their technology. This could be a market moving speech for AMD.

The Philly Fed Manufacturing Survey on Thursday is the most important economic report for the week. This is especially true given the decline in the Manufacturing ISM to two-year lows last week.

The FOMC minutes of the last meeting will be on Wednesday and it will be interesting to see if the minutes reflect the new dovish comments from Powell on Friday or did he go through a sudden conversion over the last couple of weeks of market declines. Having everyone in the US mad at you could be a heavy load to carry. His baptism by fire with the market crash on his watch could have led him to a conversion experience.

The consumer price index on Friday has a lot less importance since Powell's comments on Friday. Otherwise investors would have been in panic mode for every tenth of a percent increase.


There are very few earnings next week, but the dam is about to burst. The following week more than 250 companies will report. For Q4, 17 S&P companies have reported. Earnings growth has averaged 15.5% with revenue growth up 6.2%. These are mostly smaller companies and the numbers should rise sharply over the next two weeks. Earnings growth estimates normally rise about 4% to 6% from the start of the cycle as positive earnings surprises appear.

There have been 42 announcements of positive guidance and 71 guidance warnings for Q4.


The big news last week was not political. It was the Apple guidance warning. Shares crashed 10% on Thursday and the trickle-down effect into their suppliers decimated the chip sector. The worry over China's economic weakness translated into declines of every international stock with companies like Boeing and Caterpillar taking big hits.

Apple shares closed at the low for the day and knocked 108 points off the Dow. It was an ugly day because Apple gave the impression that China's consumer was imploding and that hit the market hard.


Fast forward 24 hours and those that bought the dip at that $142 support were well rewarded, at least for one day. Needham reiterated a buy rating but cut their price target from $200 to $180. Moness Crespi & Hardt reiterated a buy rating but cut their price target from $300 to $200. Macquarie, Loop Capital and Jefferies cut their ratings from buy to hold. Half of the 41 analysts surveyed by FactSet cut their price targets, some by as much as $100. The average target fell from $215.91 to $187.03.

I was surprised Apple shares rebounded so strongly because the outlook is still grim by Apple standards. They cut their own guidance to $84 billion in revenue, down from $89-$93 billion. Analysts were expecting $91.5 billion.

They blamed their revenue decline on China where they get 18% of their revenue. They said the decline in sales was unprecedented and tried to suggest the Chinese consumer was dying. I guess it sounded good when Tim Cook put the excuse on paper, but later revelations suggest it is an Apple only problem and not a Chinese consumer problem.

Apple has hit peak iPhone or at least peak prices. With so many competing phones with nearly as many features or even more and prices 50% less in some cases, the iPhone has lost its sex appeal. There are still some hard-core Apple fanatics that will continue to buy the latest and greatest regardless of the price. However, that contingent is shrinking. At the same time the upgrade term is expanding. Instead of a new phone every 18 months multiple surveys have found that cycle to be expanding to more than three years or even as much as five years in some price categories. The more expensive the phone the longer people are keeping them. This hurts Apple because their annual product cycle depends on customers upgrading at least every two years and that trend has suddenly faded.

Apple continues to brag about its growth in services. Unfortunately, that service growth depends on continued sales of iPhones to new customers, not to repeat customers. Of the roughly 20 people in my family, everyone has moved away from Apple and into other brands. Only 1 person still has an iPhone. I am sure that is not the case worldwide, but I am also sure there is some erosion to the customer base. Unless they come out with some new must have feature, the base will continue to erode. Smartphones are now a commodity and with most having the same features, price is now a major factor in the purchase and that puts Apple at a disadvantage.

Apple is still a great company with a single digit PE, oceans of cash, billions in buybacks and dividends, but a fading business model. Regardless of claiming to be a services company, more than 80% of their revenue comes from phone sales. Their global market share has been dwindling and in Q3 was roughly 13% compared to 23% back in 2012. The decline has slowed at that level but will probably decline further in 2019 unless they come up with that must have feature.

Apple is suffering from maturity. They exploded into the smartphone market from 2007 to 2012 and then plateaued into a mature company when their creativity began to fade as the smartphone market went from fad to commodity. Margins are going to be squeezed as Apple tries to compete on price with producers like Samsung with dozens of models and brands of ultra-cheap Chinese phones that appeal to the masses for $250 or less.

I suspect we will see a rebound in Apple shares into earnings, but guidance will be more critical than ever and it will not be believed. Fool me once, shame on you, fool me twice shame on me.



Skyworks Solutions (SWKS) was crushed on Thursday with a nearly 10% decline to a two year low after the Apple warning. The $60 level is strong support and shares did rebound on Friday to regain half of the Thursday losses. Skyworks is an Apple supplier and joined Qorvo (QRVO), Broadcom (AVGO) and Cirrus Logic (CRUS) in the pain locker on Thursday. All of those stocks rebounded from the oversold conditions at Thursday's close.

Skyworks gained 5% on Friday despite a late to the party downgrade by Nomura from buy to neutral. With support at $60 this might be an entry point.


Netflix (NFLX) was added to the Goldman Sachs Conviction Buy List saying the 36% decline from July was a buying opportunity. They have a $400 price target. Goldman said, "We continue to believe Netflix's investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally."

They expect another debt offering to finance a $3 billion cash burn in 2019 but they are laying the groundwork now for positive cash returns in 2022. Goldman cited data from Sensor Tower claiming Netflix app downloads in North America in December rose 12% YoY to record levels despite the fact that 50% of broadband households in the US already have Netflix. In Europe downloads of the app rose 49% while the rest of the world rose 71%. The company is on track to produce 90 movies in 2019 with budgets of as much as $200 million. Shares exploded higher on the news.


Intel (INTC) was upgraded from neutral to buy at Bank of America. The analyst said Intel was a "compelling large-cap investment." The price target was raised from $52 to $60 and shares closed at $47.22. The analyst said, "notwithstanding concerns about macroeconomics, competition and 10nm product delays, Intel is relatively stable due to its expanding opportunity set, incumbency, scale and US manufacturing base." Despite the upgrade the analyst only expects 2.9% revenue growth in 2019 compared to 13% in 2018. They believe 5G will be a major growth area for Intel once the standards are locked down. BofA is expecting 2019 earnings of $4.80 and 2020 at $5.25. Consensus is $4.55 and $4.69 respectively. Shares rallied $2.73 on the news.


Advisors for Sears Holding (SHLDQ) claim the $4.4 billion bid by Eddie Lampert is too low to keep the company from being liquidated. The bid will not cover legal fees from the bankruptcy and payments owed to vendors making it "administratively insolvent." Lampert is using $1.8 billion in Sears debt that he holds as part of his bid making it a "credit bid" rather than a $4.4 billion cash offer. There are also shareholder suits claiming Lampert profited personally when he organized the spinoff of Land's End and Seritage Growth Properties. Seritage is a REIT that profits from Sears dumping real estate into the trust at significantly less than market value. Lampert is pushing the bankruptcy court to not rule on the bid until January 14th when the other bids for liquidation are revealed. It would not make sense to kick Lampert's $4.4 billion bid to the curb and then find out the largest liquidation bid is $2.0 billion. Sears has not posted a profit since 2010. Shares rallied more than 100% briefly last week jumping from 15 cents to 50 cents before falling back to 30 cents.


Remember back in the fall when everyone was worried about the yield on the ten-year breaking out above 3.25% and the terror that would cause in the equity market? Analysts were on CNBC or Bloomberg nearly every day warning of the dire consequences. Obviously, their forecasts did not come to pass. Yields fell to 2.554% at the close on Thursday.

Jim Grant of Grants Interest Rate Observer and one of the smartest men I know, pointed out that there is still $8.1 trillion of global securities that have a negative yield. Without the equivalent of a nuclear event, global rates are not going to rise significantly. There is simply too much money looking for a safe home with an actual yield and currently that means US treasuries. If the global economy is slowing and the US economy is still ticking along at a 3+% rate there will always be an influx of cash into treasuries even at the ridiculous rate of issuance from our debt funded government. Eventually that will change but not in the near future.


2018 was a tough year for funds. 174 hedge funds, speculative funds and ETFs closed in Q3. Another 140 closed in Q4. The shift to passive investing and away from fee-based managed funds has been cussed and discussed all year. Many analysts said this was a driving force into the December decline because these funds were being forced to liquidate by year end and there were no material rallies to sell into. One analyst said it was equivalent to selling into a vacuum because there were no bids. With individual investors running for the sidelines, rampant tax selling in managed funds and these liquidations, all the volume was on the sell side.

Now that the tax selling is over and China trade talks are resuming on Monday, the market should continue higher into the earnings cycle. It could take some time for the volatility to fade but it should fade. 2019 will produce another year of record S&P earnings, just not at the pace of 2018.

The government shutdown has been pushed out of the headlines and a deal will eventually be reached. That could cause a momentary rebound but it is not really relative to the market. This is old news.

With a divided government nothing consequential is going to make it through both houses and be signed by the president. Enter the world of real gridlock. This means the economy should not be threatened by government for the next two years.

Investors should begin to cherry pick some of the most beaten down stocks and those that will benefit from a Chinese trade deal. Be prepared for some additional volatility but the 600-900 point swings are more than likely over.

However, the biggest market gains typically come in bear markets for obvious reasons. Sentiment gets so bad and traders are so short that some unexpected good news can power some powerful short-term moves. Be prepared for this volatility.


Markets

With Apple not dragging the indexes down, we had a good rally on Friday. Powell's dovish comments along with the blowout jobs report were what investors needed to hear.

The rally came in three stages. The overnight futures were positive and then the payroll numbers added to those gains. The S&P gapped open and then traded sideways around 2,520 for a couple hours. When Powell spoke the next leg higher began but stalled at 1:PM. The S&P traded sideways at 2,530 the rest of the day. The lack of a closing selloff was positive given the potential for weekend event risk. With the Dow up over 600 points there was a definite reluctance to continue buying in the afternoon.



Boeing was the big Dow leader and added as many Dow points on Friday as Apple removed on Thursday. The news of the resumption of Chinese trade talks on Monday this coming week, was a strong motive power.

Rising oil prices and a strong rebound in big cap tech stocks also lifted the index.

Prior support at 23,531 became resistance and that is the next level to conquer. The 24,000/24,145 level should also be a hurdle.



The big cap tech stocks were on fire on Friday after being decimated by the Apple warning on Thursday. All sectors, all varieties were seeing hand over fist buying. Alibaba was crushed on Thursday by Apple's comments of a consumer slowdown in China. After numerous companies said they were not seeing the same slowdown, Alibaba exploded higher with a $9 gain.

FANG stocks were soaring with Facebook the laggard with "only" a $6 gain. Any big cap tech stock was a winner on Friday.

The Nasdaq Composite is still 560 points below the 10% correction level and major resistance at 7,300 and above.



The Russell posted a major win with a 50-point gain and closed over the first Fib resistance level. The next hurdle is 1,409. Small cap investors should be celebrating with the relaxation of the Fed rate hike program. Higher interest rates have been a drag on the small caps since the "long way to neutral" comment on October 3rd and the top in the broader market.


While I expect the market to move higher, I am not expecting many days like Friday and there will be some profit taking along the way. I would recommend hesitation on adding new plays on Monday. Whenever there is a monster spike in short covering, there is normally a pause where shorts try to reload and those already long decide to take the easy gains. This is an extremely short-term market where holding periods are a week or maybe two weeks if you are lucky. We should see a more positive bias but don't let your excitement overload your common sense.

I apologize for the delay in email delivery. We had a problem with the email server on Saturday and the programmer was out of town.

VERY IMPORTANT MESSAGE: Please read

For 21 years I have published the Option Investor family of newsletters. I have endeavored to produce the best market commentary available. I have developed a loyal readership and hundreds of people I would call true friends. Unfortunately, all good things must come to an end.

I recently turned 71. I have 6 grandkids, two of which I have never met. By sitting in front of my monitor 10-12 hours a day, including weekends, for 21 years, I have missed countless baseball, soccer and volleyball games, plays, music recitals and family gatherings. I am tired. My health is failing. I always joked that someday somebody would enter my office and find me slouched over my keyboard dead. My recent hospital visit reminded me of my mortality and the likelihood of that actually coming true. I would like to spend my few remaining years not chained to the keyboard seven days a week.

I have been negotiating with several parties about taking over the newsletter. Unfortunately, I have not yet found anyone that I would feel confident in continuing to produce a quality product. Some want to change the product and while change is sometimes good it is also painful.

I do not want to just pull the plug and have Option Investor disappear into digital space. Unfortunately, that may be my only option if I cannot locate a successor by the end of January.

We have dozens of hedge fund managers, portfolio managers, analysts, etc, that have subscribed to this newsletter for years. We have subscribers that have been with us for 20 years. I am always amazed by their continued support.

With this letter I am reaching out to those of you who might be interested in continuing Option Investor for another 20 years. If you have interest in continuing Option Investor, please email me at the link below and I will contact you to discuss the opportunity.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Post Earnings Rebound

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes earnings reports don't work out well for the stock. Infinera just suffered through a bad earnings report but it was due to an acquisition.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW BULLISH Plays

INFN - Infinera - Company Profile

Infinera Corporation provides optical transport networking solutions, equipment, and software and services worldwide. The company's product portfolio consists of Infinera DTN-X Family of terabit-class transport network platforms, including the XTC Series, XTS Series, and XT Series; Infinera DTN-X XTC series multi-terabit packet optical transport platforms that integrate digital OTN switching and optical WDM transmission; and Infinera DTN-X XT series for terrestrial applications and XTS series for subsea applications. It also provides Infinera XTM Series packet-optical transport platform that enables high-performance metro networks with service-aware, application-specific capabilities; and Infinera Cloud Xpress Family designed to meet the varying needs of ICPs, communication service providers, Internet exchange service providers, enterprises, and other large-scale data center operators. In addition, the company offers Infinera FlexILS open line system platform that connects various Infinera and third-party terminal equipment platforms over long-distance fiber optic cable providing switching, multiplexing, amplification, and management channels. Further, it provides software solutions, including Xceed Software Suite that address long-haul, subsea, and metro networks, as well as a range of support services for all hardware and software products. The company also serves telecommunications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities. It markets and sells its products and related support services primarily through its direct sales force. The company was formerly known as Zepton Networks. Infinera Corporation was founded in 2000 and is headquartered in Sunnyvale, California. Company description from FinViz.com.

Earnings Feb 5th.

Infinera is a global supplier of terabyte speed network equipment. They are in nearly every country. Their products handle long haul data transmission even in undersea links.

Shares collapsed back in early November when they reported earnings. The CEO said the company had seen a pause in sales as buyers evaluated the combined company. They had just purchased Coriant. The CEO said revenue in Q4 would increase by 50% because of the acquisition but they would post a bigger loss on acquisition expenses.

For Q3 they lost 4 cents and analysts were expecting a 5-cent loss. The guidance for Q4 was a loss of 26-30 cents because of the acquisition.

Shares fell to $3.50 post earnings. Over the last week they have recovered to $4.25 and appear to be accelerating higher. Resistance is $5.

This is not a fast mover but all the bad news is now priced into the stock.

Readers have been requesting more low dollar stock recommendations and this would fit that scenario.

Buy INFN shares, currently $4.23, stop loss $3.75.

Optional: Buy April $5 Call, currently 35 cents, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Powell Bounce

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap sector exploded higher after Powell said the Fed would practice patience and flexibility in future hikes. The threat of interest rate hikes was the biggest drag on the small cap sector since October. Chairman Powell essentially put the Fed on hold in his speech today and the Russell exploded higher. This could be the all clear signal we have been looking for.



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


No Changes



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

Short term Calls and Puts on equities = Option Investor Newsletter

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3-6 month Option Trades = Ultimate Investor


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

No specific news. Three-week high close. AMD's president and CEO, Dr Lisa Su, will give the keynote address at CES 2019 on January 9th at 9:AM PST. This is bound to be a market moving speech.

Original Trade Description: Dec 22nd.

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. The company's products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. In addition, it provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products. It serves original equipment and design manufacturers, datacenters, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Santa Clara, California. Company description from FinViz.com.

AMD was always the red-headed stepchild that Intel kept around to prevent Intel from being called a monopoly. They let them have just enough business to keep them going. After decades of picking up Intel's scraps, the company has finally come of age and has announced multiple processor families that are more technological advanced than Intel's chips and they are 12-18 months ahead of Intel's first foray into this level of manufacturing.

Cloud operators are taking notice of the faster, cooler, cheaper processors and this sector buys hardware by the truckload. AMD is stealing market share from Intel and this is likely to accelerate as these new processor families flood the market before Intel can catch up.

Earnings Jan 23rd.

Over the last two weeks of Nasdaq decline, AMD pulled back to uptrend support and could be ready to rebound sharply if the market cooperates.

Position 12/24:
Long April $20 Call @ $1.70, see portfolio graphic for stop loss.



REI - Ring Energy - Company Profile

Comments:

No specific news. Shares rebounded thanks to the rise in oil prices.

Original Trade Description: Dec 29th.

Ring Energy, Inc., an exploration and production company, acquires, explores for, develops, and produces oil and natural gas in Texas, the United States. As of December 31, 2017, the company's proved reserves consisted of approximately 31.9 million barrel of oil equivalent. As of the above date, it also had interests in 8,102 net developed acres and 61,772 net undeveloped acres in Andrews and Gaines counties; and 10,235 net developed acres and 9,682 net undeveloped acres in Culberson and Reeves counties. It primarily sells its oil and natural gas production to end users, marketers, and other purchasers. The company was formerly known as Transglobal Mining Corp. and changed its name to Ring Energy, Inc. in March 2008. Ring Energy, Inc. was founded in 2004 and is headquartered in Midland, Texas. Company description from FinViz.com.

Ring is an up and coming shale oil producer. With oil prices down so sharply over the last three months, Ring shares were knocked back to $4 after trading above $16 in May. The decline in crude prices is about over. The current $45 level is not economic for many producers and a major pain level for the OPEC nations. They are rapidly cutting production to lift prices higher. This will lift all the US energy stocks as well.

Their Q3 earnings were 14 cents beating estimates for 11 cents. Revenues of $32.7 million rose from $16.4 million in the year ago quarter. Revenues for the first 9 months of 2018 rose from $43.4 million to $92.5 million. Production rose from 346,900 barrels to 555,020 barrels, a 59.9% increase. Gas volumes increased 39.2% to 280,200 Mcf. On a Boe basis production rose 58.1% from 380,426 to 601,720 Boe.

They closed an acquisition of 4,763 net acres in Andrews County Texas on December 26th that gave them 55 new horizontal drilling locations. The leases are adjacent to Ring's currently operated properties. The seller was Tessara Petroleum, a wholly owned subsidiary of the Carlyle Group. The Carlyle Group took payment in stock saying, "We have chosen to receive consideration in the form of stock as we believe Ring is a best-in-class operator and the assets being transferred are synergistic with Ring's existing properties that lie just across the lease line. We are fortunate to have found a partner that we admire and trust and look forward to seeing Ring increase its scale and value over time."

The Carlyle Group are smart people. If they believe Ring is going to appreciate, it is likely to happen. Ring's production is growing rapidly and with oil prices rebounding the stock should continue rising as well.

Position 12/31/18:
Long REI shares, currently $5.28, see portfolio graphic for stop loss.



BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

Outstanding decline of 8%. We just need the market to remain positive for a week without any hiccups.

The VXX will eventually be single digits but it could be months in the future.

Previously: Earlier this year, a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

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.
Position 9/6/18:
Short VXX shares @ $54.27, see portfolio graphic for stop loss.

Average cost = $47.61.