Option Investor

Daily Newsletter, Saturday, 1/19/2019

Table of Contents

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

Market Wrap

Back to 2017

by Jim Brown

Click here to email Jim Brown

The Dow and S&P closed on Friday within a couple points of where they closed 2017.

Weekly Statistics

Friday Statistics

The futures were already positive overnight before the news broke of the potential offer from China to buy $1 trillion in goods from the US over the next six years. That would push the deficit with China to nearly zero by 2024 as purchases ramp up. They can easily accomplish this with purchases of food, oil and LNG. These are things they need in abundance and we have plenty to sell.

Since negotiators are not going to meet again until two weeks from now, this was seen as a "soft" offer or a trial balloon. They made a suggestion in the press and both countries will see how it plays out with their parties.

This would give both presidents something to claim as a big win and not really have to get into much detail on the harder issues. The key will be whether President Trump is desperate enough for a win that he withdraws his demands for intellectual property reform and forced technology transfers. These are the more important problems and the ones hardest to correct. Most believe it will take a concerted and lengthy effort by the WTO and TPP members to force China to make the changes. Analysts do not believe Trump can force China to do anything on those issues. Trade representative Lighthizer told Senator Chuck Grassley last week that he did not see anything material being changed.

Since the president watches the market constantly as a barometer of his success, he may want to notch a big win on the surface and decide to fight again on the remaining problems if he is reelected. That would remove a major cloud from the market today.

Investors are so excited that there may be an end to the China trade problem that they were buying everything in sight on Friday. If this continues next week ahead of the meeting with China, we could see a sell the news event if a deal is eventually announced. All the expectations would already be priced into the market.

The Consumer Sentiment report for January was a huge disappointment. The headline number declined from 98.3 to 90.7 and the lowest level since October 2016 and just before the presidential election. There are 800,000 people out of work and daily feuds between the president and democratic leaders suggest the shutdown could go on for weeks. The Nasdaq had fallen more than 25% int a bear market at the end of December. I am surprised the headline number was not lower.

The present conditions component fell from 116.1 to 110.0 and the expectations component fell from 87.0 to 78.3. Businesses reporting improved conditions declined from 59% to 45%. Take 800,000 spenders out of the market and you are going to see an impact to retail expectations.

I doubt anyone is going to get too upset over this number since it was clearly the result of the government shutdown. If the government were to reopen next week it would probably be several months before sentiment returned to prior levels. It rises slow but comes down fast.

Industrial production rose 0.3% for December, the seventh consecutive month of gains. It was a close call because utility production declined -6.3% because of unseasonably warn weather. The nationwide blizzard this weekend will pump up production numbers for January. Motor vehicles and parts rose +4.7% and mining/energy +1.5%. Those two categories offset the decline in utilities.

Manufacturing output increased 1.1% and the largest gain since last February. That represents a 3.2% rise over the last 12 months. Total capacity utilization rose 0.1% to 78.7% and the highest level in four years. The report was ignored.

The few reports we had over the last week offset each other in GDP impact. The Atlanta Fed real time GDPNow forecast for Q4 is 2.8%. The first look at the Q4 number is scheduled for Wednesday January 30th but it will not happen unless the government shutdown ends.

Analysts are mostly in agreement that the shutdown is subtracting between 0.1% to 0.15% from Q1 GDP each week. If it continues past the end of January that number rises to -0.2% per week. People will have spent their savings and drained their checking accounts and the consumer spending shutdown will be in full bloom. Most shutdowns last about a week. They rarely even produce a noticeable drop because impacted families have a week or two of cash in their accounts and credit cards. After two weeks those assets have been plundered and they are starting to look under the sofa cushions, emptying the piggy banks and cleaning out the change holders in the car. After four weeks they are taking stuff to pawnshops and borrowing money from friends. This creates more debt and takes longer for the depression period to be erased once the shutdown is over.

The market is closed on Monday for Martin Luther King Day.

Some of the reports listed may not appear because of the shutdown and the impact on government agencies but I listed them anyway just in case there is a breakthrough in the standoff.

Next week is Fed week again. It seems like the meetings are coming with increasing frequency but that is only because the uncertainty is causing them to be more traumatic and that produces more coverage in the press before and after the events. Every meeting in 2019 will have a press conference and the potential for a rate hike. At least that was the idea when Powell set it up this way six months ago. He was anticipating rate hikes in 2019.

Currently there is only a 0.5% chance of a rate hike at the January meeting based on the Fed funds futures. Even if you go all the way out to the December meeting there is only a roughly 28% chance of a rate hike. This means that at some point in the year, Powell is going to upset the market with an unexpected hike, but most believe July would be the earliest potential hike and even today there is only a 31% chance based on the futures.

January Meeting

December Meeting

The US and Chinese trade delegations will meet again in two weeks. I do not have the exact date, so I did not put it on the calendar. While they could reach some agreements, nothing will happen until Trump and Xi meet again so both can get their Kodak Moment signing the agreements. March 2nd is the date the US tariffs on China rise from 10% to 25% so expect an agreement before March 2nd.

Earnings intensity increases next week with a bit more diversity in the company's announcing. IBM and Intel will be the biggest tech stocks followed by several chipmakers. Starbucks reports on Thursday. Other Dow components include JNJ, PG, UTX and TRV.

Some 55 S&P companies have reported Q4 earnings with average growth of 14.2%. More than 76% have beaten analyst estimates. Revenue growth has averaged 5.6% with 58.2% of companies beating estimates. The current forward PE is 15.4. There are 60 S&P companies reporting next week.

Historically the actual earnings growth ends the quarter about 4% higher than the estimates at the beginning of the cycle. That would put Q4 earnings growth in the 18% range if the trend continues. We will track this as the cycle progresses.

The big news for Friday was the reaction to the Netflix earnings after the bell on Thursday. Earnings of 30 cents beat estimates for 24 cents. However, revenue of $4.19 billion missed estimates for $4.21 billion. The 30 cents of earnings were only one third of the 89 cents they posted in the year ago quarter as the company pours money into content generation. They created 781 hours of original content in Q4.

They added 1.5 million domestic subscribers and 7.3 million international subscribers. The 8.84 million totals easily beat their own projections for 6.1 million. They ended the quarter with 139.26 million paid members. They probably have twice that many if you count the shared passwords where people are not paying. Netflix said they now accounted for more than 10% of TV hours watched in the US. More than 80 million people watched the recently released movie "Bird Box" with Sandra Bullock. That is 2 hours of my life I can't get back.

In addition to the minor revenue miss they guided for 21% revenue growth in Q1. That was below estimates for 24.1% and $4.59 billion. For the full year in 2018 revenue rose 36% to $15.79 billion and missed estimates for $15.81 billion. They guided for Q1 earnings of $253 million that missed estimates for $371 million.

CEO Reed Hastings said they lost more viewers to the game Fortnite than they did to HBO or any of the other streaming networks trying to garner eyeballs.

Shares declined 4% after the earnings BUT 22 analysts upgraded the stock or raised their price targets. The key point was a claim by Hastings that costs have peaked and would remain flat in 2019 and then decline. Cash burn in 2019 would be the same $3.1 billion as in 2018 but then decline. Basically, after ten years of rampant growth and creating thousands of hours of original scripted content, they expected to be at a point where revenue will eventually exceed costs and profits will increase.

Amazon got a pass for the last 18 years because they were building the business. Earnings were nonexistent and everyone believed the Bezos dream of build it and they will come. The same has been true for Netflix. They have been given a pass in years past because of the rampant growth of the business model. They are growing so fast, all the new startup streaming companies will be a decade behind them and most will never progress out of a domestic audience. By the time Disney has 25 million subscribers, Netflix will have over 200 million, maybe well over 200 million. They are growing at the rate of 8 million per quarter and that number is accelerating. Now that Netflix is in more than 190 countries and their infrastructure is already built they are a decade ahead of everyone else. Nobody else can afford to spend the $100 billion it took for Netflix to get to this point.

Of the 14 analysts that raised their price target on Friday, the average target was $430 with the highest at $500 by Pivotal Research Group. The lowest was Nomura at $320, a $20 increase. There were 12 targets hikes over $400 just on Friday.

Give up buying options on Netflix. With the stock at $340 it would cost you $17 to buy a $400 call for June. A better plan would be to buy a $350 call for $35 and sell a $320 put for $27 and have a net debit of $8 for a position only $10 OTM.

Tesla (TSLA) shares were knocked for a 13% loss after the company said it was laying off 3,100 workers to increase margins. The company said it would report a profit for Q4, but it would be less than the $312 million is posted in Q3. Musk said they were still ramping up Model 3 production ahead of the end of tax credits on July 1st. He said Tesla had to continue making manufacturing improvements and reducing costs in order to make a 220-mile range Model 3 for $35,000, which was the original goal. He said the most affordable current offering was a 264-mile car with premium sound and interior for $44,000. As of July 1st, the price of a Model 3 will rise $1,875 when the tax credit ends.

The company delivered almost as many cars in Q4 as they did in all of 2017. Musk said the company would post a minor profit in Q4 "with great difficulty, effort and some luck" thanks to accelerated shipments of higher priced cars to Europe and Asia.

Tesla increased its employee count by 30% when they were racing to produce high volume of the Model 3 to satisfy investors and the backlog of customers. In the earnings warning there was no guidance for future production. Musk had promised 10,000 Model 3s per week in 2018 and then lowered that to 7,000. They are currently producing just under 5,000 after having hit that number several times. Analysts believe they will never hit 10,000 and probably reach a sustainable 5-6,000 sometime in 2019. Musk is finding out that making cars is hard and Tesla is probably running out of buyers willing to pay $60-$75K for a fully featured Model 3. The remaining reservations are more than likely for the budget model and that is where profits are hard to produce.

Apparel maker VF Corp (VFC) celebrated its earnings report with a 12% gain in the stock. The company said it was seeing high demand for its Vans shoes and North Face apparel. They reported earnings of $1.31 that beat estimates for $1.10. They posted a loss of 23 cents in the year ago quarter. Revenue rose to $3.94 billion and beat estimates for $3.87 billion.

The division not doing well was the Lee and Wrangler jeans where revenue is expected to fall 3% in 2019. The CEO squashed rumors they were going to acquire Skechers saying the rumors were not true and the product would not fit well in the current portfolio.

Oil services giant Schlumberger (SLB) reported earnings of 36 cents that matched analyst estimates. This was substantially better than the $1.63 loss in the year ago quarter .Revenue declined slightly from $8.504 billion to $8.180 billion but still beat estimates for $8.044 billion. The company said the surge in shale production even while oil prices were falling, helped them to improve their earnings. Oil production hit a record 11.9 million bpd last week.

Schlumberger said 2019 should provide a more stable supply/demand balance once Russia and OPEC complete their production cuts. The CEO reminded that the exceptions to the Iran export sanctions will expire six months after the sanctions were imposed. Schlumberger said they were cutting back on capex in 2019 to a range of $1.5-$1.7 billion and down from the $2.1 billion in prior guidance. They warned that the volatility in crude prices has led to more uncertainty among producers. Shares rallied 8% on the report.

Alibaba (BABA) said it was cutting spending on travel and postponing new hiring until April. The company is bracing for a slowdown in the Chinese economy. Chairman Jack Ma said the trade battle with the US was causing a slowdown all over Asia and was hitting all sectors. Offers to prospective new hires were only effective if they agreed to start in April. The company is restricting air travel and no longer paying for expenses like cab fares.

China is expected to grow at a 6.2% pace in 2019 and the slowest growth since 1990. Car sales in 2018 fell for the first time in more than 20 years. Debt to GDP rose to 253% up from 140% in 2008. No country in history has ever been able to solve that large of a debt crisis without a financial calamity. The US debt to GDP is 108%. Some 24% of outstanding loans ($8.5 trillion) in China are non-performing. That means they are no longer making the payments, but the banks are keeping them on the books rather than take the pain of writing them off.

Apple shares were positive but only barely. The cloud hanging over Apple grew darker after Taiwan Semiconductor (TSM) warned of a major earnings miss because of declining smartphone sales. Q1 revenue is now expected to be in the range of $7.3-$7.4 billion, down 14% and well under the $8.1 billion analysts expected. The company said slowing demand for high end phones had caused a sharp increase in inventory levels. TSM received 45% of its income from smartphones and Apple is its biggest customer. They said due to the sector outlook they were cutting capex spending by several hundred million dollars. Analysts warned that channel checks suggested the surplus inventory of phones could continue for the first half of 2019. Shares posted a small gain after a decent rebound on Thursday.

Analysts are still positive on Apple but continue to cut their estimates given the universal slowdown in the chip sector. Apple is getting pushback from developers for its high prices in the App Store and the prior upgrade cycle trend is fading fast. Without some killer feature on the 2019 lineup of phones, and a lower price, the company could warn again.

Phones, with the exception of the iPhone, are getting cheaper. Apple was forced to cut prices by 20% in China last week to compete with lower cost models and flush out a buildup of inventory in China.

Numerous analysts love Apple but are concerned earnings could be even less than expected. Apple warned but conditions have come to light since then that produced more concern.

Facebook (FB) is under the gun and the FTC is considering a "record" fine for its recent privacy mistakes. In 2011 the FTC entered into a settlement agreement with Facebook over repeated privacy violations. The settlement agreement period runs until 2031 and requires Facebook to get explicit permission from users before sharing any personal information that is not already covered by their privacy settings.

Facebook has violated this settlement multiple times over the past year and the FTC is planning on making them pay a lot for their transgressions. The feeling is that it will be enough to force them to do a better job of policing in the future. The FTC will not comment officially but we saw a $5 billion fine in Europe against Google. The repeated violations of the privacy rules by Facebook when they already have a privacy settlement in place, suggests this fine could be a whopper. Facebook has 2.2 billion users so just $2 each would be a major fine.

Ten months ago, the Cambridge Analytica scandal broke and Facebook was tortured for months with testimony and public humiliation. In December they acknowledged the photos of 7 million users had been shared publicly even though they were private. Facebook is also under investigation in multiple other countries for the same problem. This is going to be painful. Earnings are January 30th.

Microsoft (MSFT) is getting out of the phone business. They recommended that anyone using a Windows Phone using the Windows 10 mobile platform should immediately switch to an iOS or Android device. On December 10th, 2019, Microsoft will stop providing new security updates, hotfixes, assisted support options or technical content updates from Microsoft. Microsoft spent tens of billions of dollars trying to produce a competitive Windows phone. They even bought Nokia for $7.6 billion in order to produce their own phones. They eventually wrote that acquisition off as a failure. If you have a Windows Phone, save it for 20 years and sell it as a historical antique much like old Apple computers today that go for thousands of dollars.

Crude prices surged on Friday after the $1 trillion trade proposal was floated by China. Getting a trade deal done and especially one where China buys that many products from the US would increase oil demand. China is a major importer of oil. If they complete a trade deal that removes all the tariffs it means China's factories can go back to work at full production and that requires more oil.

The US is becoming a major oil exporter at 2-3 million bpd and rising. If China signs a $1 trillion deal, oil purchases and LNG purchases are going to be on that list. Having a big buyer locked in will support WTI prices long term. Crude closed at a two-month high.

The three months of falling prices finally took a big toll on active rigs. Land rigs in the US fell by a whopping -25 for the week ended on the 18th. Twenty-one oil rigs and 4 gas rigs were taken out of service. An additional two offshore rigs were offline. Despite the decline in rigs, oil production rose 200,000 bpd to 11.9 million bpd and a new record.

The EIA said last week that US production will rise to average 12.9 mmbpd in 2020 and lead the US to export more oil than it imports. The average production in 2018 was 10.9 mmbpd. That will rise 2.0 mmbpd by 2020 to average 12.9 mmbpd but that means the actual production at year end will be well over 13.0 mmbpd. At the end of 2018 net imports into the US fell to 2.4 mmbpd because our exports were rising rapidly. By the end of 2020 the EIA expects the US to become a net exporter by 900,000 bpd.

Refined product inventories continued to grow but oil inventories are barely declining. Refinery utilization declined sharply to 94.6% for the week ended on the 11th.


Just how bad was the market crash in Q4? Investors pulled a record $143 billion from actively managed funds in December alone. That brought the total for the year to -$301 billion and just below the record of $320 billion in 2016. Passive funds and ETFs gained $60 billion in December as investors fled to a cheaper, longer term investment. Passive index funds have risen to $6 trillion in assets while ETFs have risen to $3.6 trillion in assets. Investors are losing faith in fund managers since most did not beat the market in 2018.

The Dow and S&P both closed within only a few points of their 2017 close. The S&P closed at 2,673 on December 29th, 2017 and 2,670 on Friday. The Dow closed 2017 at 24,719 and closed on Friday at 24,706. For both indexes to be so close to their 2017 levels at the same time is remarkable. All the volatility of 2018 is hopefully behind us.

The S&P surged over the 10% correction level at 2,637 and appears to be headed for round number resistance at 2,700 followed by the convergence of multiple resistance lines at 2,750. The ultimate test will be 2,800. Once over 2,700 that higher target will become a magnet for investors and could prompt a sell the news event when reached.

The Dow had a great day on Friday with all the tariff sensitive stocks posting strong gains. Unfortunately, the China news story is going to fade before we get any real data. The next trade meeting is not for two more weeks. Minor details may leak out, but any real deal will not occur until Trump and Xi meet again to sign any deal and get their pictures taken for the consumers at home.

The Dow eased over minor resistance at 24,700 by only 6 points so that level is still in play. The real hurdle will be 25,000 and the convergence of the 100/200 day averages and the horizontal resistance since July. After the big run over the last four weeks, the Dow is very overbought and continued gains could be rocky.

The Nasdaq has yet to regain the 10% correction level at 7,298 and there are multiple types of converging resistance at that level. The downtrend resistance since October and the 100-day average as well as the round number resistance at 7,300 should make that a volatile location. The big cap tech stocks have been mostly positive for the week and the index gained 2.6% so it was a good week. The techs are lagging the big cap indexes because of weakness in the chip sector, thanks to Apple. There are only a handful of tech stocks reporting next week so the following week is where the tech earnings will flow.

The Russell had a good week after a slow start. After three weeks of gains it went through several days of consolidation before surging ahead. The lack of a rate hike threat and the potential for a trade deal helped encourage fund managers it was safe to buy small caps again.

While I believe the market is going higher, we have had a four-week rally and the Dow is very overbought. We are at risk for a post earnings consolidation period. Since tech earnings are still a week away that should get us through this week without any major decline. Expectations are still in play. Several high-profile earnings misses or warnings could easily kill those expectations but investors have been buying bad news. I would continue buying the dips until we are proven wrong.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Acquisition Candidate

by Jim Brown

Click here to email Jim Brown
Editor's Note

Rumors flying, shares rising, outlook positive. What's not to like? Investing on acquisition rumors is normally a losing proposition unless there are strong fundamentals as a fall back reason.


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


BOX - Box Inc - Company Profile

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares broke over three-month resistance on Friday and the next material level is $24.

Buy BOX Shares, currently $19.88, stop loss $18.35.
Optional: Buy March $21 Call, currently $1.05, stop loss $18.35.


No New Bearish Plays

In Play Updates and Reviews

Small Cap Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

Earlier in the week the majority of small cap charts were turning negative. That changed in the last 24 hours of market activity. When the China news began to appear on Thursday the small caps turned up. When confirmation appeared on Friday, the leaders rebound sharply to return to their prior three week trend.

The Russell surged past resistance at 1443 and 1463 to come to a dead stop at downtrend resistance. This will be the hurdle for next week with round number resistance at 1,500 if the index can reach it.

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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Long term option investments = LEAPS Investor

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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


The chip sector was weak until Friday and that weighed on AMD and the Nasdaq. AMD rebounded Friday to close at a 7-day high. Earnings coming on the 29th.

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.

Update 1/10: AMD's president and CEO, Dr Lisa Su, gave the keynote address at CES 2019 on Thursday. She announced the fastest GPU video card they have ever produced running on a 7nm process. The card has 60 compute units, 3840 stream processors, 16gb of ultra-fast HBM2 memory with a 1 TB memory bandwidth for stunning high speed graphics on 4K and 8K monitors. Shares popped at the open but faded in the afternoon.

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

INFN - Infinera - Company Profile


Shares were flat on news the president would sign an executive order regarding networking equipment made in China. It should actually help Infinera but the sector was down on the news.

Original Trade Description: Jan 5th.

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.

Update 1/10: The Australia to Japan undersea cable completed a major upgrade of the 12,700 kilometer cable system using Infinera ICE4 devices allowing multi terabit capacity.

Position 1/7/19:
Long INFN shares @ $4.22, stop loss $3.75.

Optional: Long April $5 Call @ 31 cents, no stop loss.

NUAN - Nuance Communications - Company Profile


No specific news. No material movement. ERASE PURPLE LINES

Original Trade Description: Jan 16th.

Nuance Communications, Inc. provides voice recognition and natural language understanding solutions worldwide. It operates through five segments: Healthcare, Automotive, Enterprise, Imaging, and Other. The Healthcare segment offers clinical speech and clinical language understanding solutions, such as Dragon Medical, a dictation software that allow physicians to capture and document patient care in real-time; transcription solutions, which enable physicians to streamline clinical documentation with a transcription platforms; clinical document improvement and coding solutions; diagnostic solutions that allow radiologists to document, collaborate, and share medical images and reports; and professional and personal productivity solutions to business users and consumers. The Automotive segment provides branded and personalized virtual assistants and connected car services for automotive manufacturers and their suppliers. The Enterprise segment offers On-Premise solutions and services, an automated customer service solution that comprise automated speech recognition, voice biometrics, transcription, text-to-speech, and dialog and analytics products; and On-Demand multichannel cloud, a platform, which offers enterprises the ability to implement automatic customer service. The Imaging segment provides multi-function printer (MFP) scanning and document management solutions; MFP printing and document management solutions to capture and automate paper to digital work flows; and PDF and OCR software for capturing, creation, and management of document work flows. The Other segment offers voicemail transcription and other value-added services to mobile operators; and speech recognition solutions and predictive text technologies for handset devices. The company was formerly known as ScanSoft, Inc. and changed its name to Nuance Communications, Inc. in October 2005. Nuance Communications, Inc. was founded in 1992 and is headquartered in Burlington, Massachusetts. Company description from FinViz.com.

Multiple positive headlines over the last three weeks plus an appearance at the JP Morgan healthcare conference last week has brought new life to Nuance.

In mid November the company announced the spinoff of its automotive unit and shares tanked in an already down market. The spinoff will be completed before the end of 2019 so it is not anything that should impact price today.

Their expertise in voice recognition software is being married with a new AI background to bring this technology to a wide range of applications. Organic revenue rose 12%.

Shares have rebounded from $12.50 to $15.20 in three weeks and could easily retest their November highs near $18 on the new business applications. Fund managers are looking for beaten down small cap stocks as we move into 2019.

Earnings February 19th.

Buy NUAN shares, currently $15.20, see portfolio graphic for stop loss.

Optional: Long Apr $16 call @ 90 cents, see portfolio graphic for stop loss.

REI - Ring Energy - Company Profile


No specific news. Shares still stalled despite 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.

SNCR - Synchronoss Technologies - Company Profile


No specific news. Clear breakout over resistance.

Original Trade Description: Jan 5th.

Synchronoss Technologies, Inc. provides cloud, digital, messaging, and Internet of things platforms, products, and solutions worldwide. Its products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. The company also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, healthcare, and life sciences markets; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

At CES 2019, Synchronoss Technologies announced a partnership with TBCASoft to redefine telecom operators with a blockchain payment processing system. This will allow users to make instore payments, mobile and digital purchases directly from their phones using the Synchronoss secure-multichannel communications platform. Payments can be made vis SMS, email and rich communications services (RCS) leveraging the TBCASoft cross-carrier blockchain payment system. Synchronoss plans to leverage distributed ledger technology to remove middlemen parties typically found in other payment ecosystems.

Shares rose 20% over the last 10 days as the news surrounding CES became known in the investor marketplace. The stock is on the verge of a breakout to a seven-month high.

Earnings Feb 6th.

Position 1/14/19:
Long SNCR shares @ $6.75, see portfolio graphic for stop loss.
Long March $7.50 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Minor decline because of holiday weekend event risk. We just need the market to remain positive for another week without any major 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.

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