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Daily Newsletter, Sunday, 2/3/2019

Table of Contents

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

Market Wrap

Six Weeks and Counting

by Jim Brown

Click here to email Jim Brown

The Dow has gained nearly 3,500 points in six consecutive weeks of gains.

Weekly Statistics

Friday Statistics

The Dow managed to stay positive most of the day with a +184-point rally on the morning economic reports. A little post earnings depression and some light weekend event risk pushed it slightly negative, but buyers were waiting, and the index closed above 25,000.


The Nasdaq never had a chance with Amazon losing 92 points. I am surprised the index made it into positive territory in the morning given the Amazon drag. Amazon was responsible for 37 Nasdaq points and Microsoft was second on the anchor list at 10 Nasdaq points.


There were quite a few economic reports for a Friday because several had been postponed during the shutdown. The calendar for next week is a moving target with Moody's showing one set of dates and Econoday and Bloomberg showing different dates. Hopefully after we get past next week all the reports will reset to their normal schedules.

The first major report for Friday was the Nonfarm Payrolls. The economy created 304,000 jobs and well over the latest estimate for 160,000. However, the blowout 312,000 number from December was revised down to 222,000 and the November gain of 176,000 was revised up to 196,000 for a net drop of 70,000 jobs due to revisions.

Goods producing jobs rose 72,000 and service jobs rose 232,000. The unemployment rate rose to 4.0% because more people entered the workforce thanks to available jobs and higher wages. Government workers were classified as unemployed even though they were still employed and just on furlough. Average hourly earnings rose 0.1% and the workweek was flat at 34.5 hours.

Construction jobs rose 52,000, healthcare jobs rose 42,000, leisure and hospitality added 74,000 jobs, transportation and warehousing added 27,000 and retail rose by 21,000. Personal and businesses services rose 30,000 and manufacturing added 13,000.

The headline numbers and percentages were impacted by the annual full-year revisions. Each January the government looks back at the yearly releases and the adjustments in the following months and produces a "final revision" for the year. The impact this year was negligible.

January was the 100th consecutive month of job gains and the pace seems to be growing stronger. The 3-month moving average after the revisions is now 241,000.

Because of the impact of the government shutdown we could see a dramatic shift in the February report, assuming another shutdown does not occur on February 16th.


The ISM Manufacturing Index for January rebounded from 54.1 to 56.6. Analysts were expecting a repeat of the 54.1. This is very good news for all those analysts worried about a 2019 economic decline. The new order component rose from 51.3 to 58.2 but order backlogs barely changed at 50.0 to 50.3. Production rose from 54.1 to 60.5.

The two best components were prices paid, which declined from 54.9 to 49.6 and customer inventories rising only slightly from 41.7 to 42.8. Prices paid fell into contraction territory and indicates no inflation on the horizon and no fear of a Fed rate hike. Prices paid hit 76 back in June so this is a significant decline and very good for manufacturers. The customer inventories remain very low and suggest continued strength in manufacturing as companies replenish their stocks.


Consumer sentiment was little changed from the initial January reading. The headline number rose from 90.7 to 91.2 in the revision but that was still a 7-point decline from the 98.3 in December. That was the largest monthly decline since December 2012.

With the longest partial government shutdown in history, worries over Chinese tariffs and the December market crash, I am surprised it was not worse. February should show a significant improvement assuming there is not a second shutdown.


Construction spending for November posted a stronger than expected rise of 0.8%. Analysts were expecting +0.3% after a previously reported decline of -0.1% in October. That was revised higher to +0.1%. Private residential construction rose 3.5% and was responsible for the headline gain. Public construction declined -0.9%. Overall construction spending is up 3.4% YoY and public construction is up 7.0%.

Wholesale inventories rose 0.3% in November, compared to estimates for 0.5% and a 0.8% gain in October. The inventory levels are being impacted by the tariffs on Chinese goods and the expectations they could be boosted to 25% on March 1st.

Vehicle sales slumped in January to an annualized pace of 16.7 million. With the government shutdown in place for most of the month and brutal cold weather it should not be a shock that sales suffered. Light truck sales were the hardest hit falling from 12.2 million to 11.3 million annualized.

The frequency of economic reports declines sharply next week as the backlog of missed reports dwindles. The ISM Nonmanufacturing and Factory orders are the most important reports.

Fed Chair Powell will speak on Wednesday and that will always be important for the market. If he is smart, he will try to avoid any market moving comments and not disrupt the current rally.

The State of the Union is Tuesday evening and that is sure to touch on a lot of topics and further increase political divisiveness. Ironically, the topic of the speech is supposedly "Unity." This will be the full use of the bully pulpit in a last-ditch effort to get funding for border security before being forced to declare a national emergency. Republicans will be cheering, and democrats will be putting their lawyers phone numbers on speed dial in case it actually happens. The speech should not have any material impact on the market.


Some 234 S&P companies have reported earnings with the current blended forecast for Q4 at 15.5% and 6.2% revenue growth. Unfortunately, the forecast for Q1 is dropping rapidly. Last month the forecast was for 8% growth and that has declined to only 0.7% growth. Net income estimates have turned negative at -1.6% and dropping sharply. This is going to get the market's attention very soon and it may not be pretty. If earnings are declining, the "E" in PE, then prices "P" will also decline.

Next week will see 97 S&P companies report. As you can see by the graphic below the number of high-profile companies has shrunk significantly. The earnings peak was last week, and it is downhill from here. There are still a lot of big cap companies to report but they are not names you hear every day. We are moving into mid-cap week and next week we will see the small cap sector begin to report.

We are nearing the point in the cycle where post earnings depression will begin to appear. We are already seeing it in the Dow, and we could see it in the Nasdaq next week. However, it is normally expiration week when the weakness really begins to appear.


Friday is not normally a big earnings day, but this cycle was heavier than most. Honeywell (HON) got off to a good start at the open but ran out of steam in the rapidly fading market. The company reported earnings of $1.91 that beat estimates for $1.89. Revenue declined 10% to $9.73 billion due to the spinoff of its transportation systems but still beat estimates for $9.70 billion. They guided for 2019 for earnings of $7.80-$8.10 on revenue of $36.0-$36.9 billion. Analysts were expecting $7.86 and $37.07 billion. Honeywell said strength in aerospace, defense and warehouse automation led to the strong earnings. Shares were up $6 at the open but faded to a $1 gain.


Chevron (CVX) reported earnings of $1.95 that beat estimates for $1.87 despite the falling oil prices in Q4. Revenue rose from $37.6 billion to $42.4 billion but narrowly missed estimates for $42.5 billion. Net production rose 7% to 2.93 million Boepd. They guided for 2019 production to rise 4-7%. They added 1.46 billion barrels of reserves in 2018. They repurchased $1 billion in shares in Q4 and increased the dividend by 7 cents to $1.19.

They produced an average of 338,000 Boepd from the Permian and expect to increase that to 600,000 bpd by the end of 2022. Bloomberg reported that Chevron had approved a $25 billion stock buyback program, but I could not find that in Chevron filings. Chevron said earlier in the week it was buying a Pasadena Texas refinery for $350 million from Brazil based Petrobras. Chevron is looking for a home for all that Permian oil they are shipping to the Gulf. Running it through their own refinery will increase their profits.


Exxon Mobil (XOM) reported earnings of $1.41 that easily beat estimates for $1.08. Revenue rose from $66.52 billion to $71.9 billion but missed estimates for $72.53 billion. Production rose to 4.01 million Boepd and beat estimates for 4.0 million. Exxon said its capital budget for 2019 is $30 billion, a 16% increase over 2018. Most of the spending will be on deep water and LNG projects.


Merck reported earnings of $1.04 that beat estimates by a penny. Revenue rose 5% to $10.99 billion and beat estimates for $10.95 billion. Sales of Keytruda rose 66% to $2.15 billion. They guided for 2019 earnings of $4.57-$4.72 on revenue of $43.2-$44.7 billion. Analysts were expecting $4.69 and $44.2 billion. Shares rallied $2 back to resistance at $76.50.

Currency issues lowered revenue by 3%. Keytruda was not the only drug winner. Gardasil, an HPV vaccine, saw sales rise 32% to $835 million. Bridon, Pneumovax and ProQuad all saw strong double-digit sales gains.


Discussing earnings would not be complete without talking about Amazon. The company reported earnings of $6.04 that beat estimates for $5.65. Revenue of $72.4 billion beat estimates for $71.88 billion. Investors were not impressed. The company guided for Q1 revenue of $56-$60 billion and analysts expected $60.83 billion. Even with the lowered revenue forecast it would still be an increase of 10-18% in a normally slow quarter. The company also said spending will increase at a significantly faster rate as they accelerate the process on HQ2 and other endeavors. Shares fell $92.

Investors should remember that Amazon went for years with no profits under the "build it and they will come" theory. Consumers arrived in record numbers. Annual profits in 2017 were $3 billion and that jumped to more than $10 billion in 2018. How many companies are increasing profits that quickly?

In retrospect 2018 was the result of all that capital investment in 2016-2017. This was the beginning of the payoff. Now Amazon is planning on spending another $10-$20 billion on their next round of investments. Amazon is still digesting the Whole Foods purchase. Revenue from its physical stores, which total about 500, declined 3% to $4.4 billion. This is growing pains as they try out multiple formats of retail locations in addition to Whole Foods. Actually, when adjusting the reporting calendar for Whole Foods to match Amazon's, sales were up 6%.

Amazon Web Services revenue rose 45% to $7.43 billion and operating income rose 61% to $2.18 billion. Revenue growth in its advertising business rose 95% to $3.39 billion. For the full year advertising revenue more than doubled from $4.65 billion to $10 billion.

Amazon is suffering from the law of large numbers. When revenue was $7 billion a quarter, raising it to $10 billion (+43%) was not that big of a jump given the total addressable market. The market was fertile and Prime subscriptions were small. Now that revenue is $72 billion and nearly every online shopper in America is a Prime subscriber, it is harder to move the needle. A 43% jump in Q4 revenue would mean a $31 billion increase. That is larger than the market cap of most S&P companies. The jump in package volume would almost need another UPS to deliver them.

In order to continue growing, Amazon is reaching out into other areas besides online shopping and to areas where online shopping has not taken hold. They mentioned a big spend in India where they are trying to establish a beachhead. There are 1.4 billion people in India compared to 330 million in the USA. If they are successful in dominating online market share in India, they could easily double existing revenue in 3-5 years. Of course, they are fighting the Alibaba companies on what could be considered home turf.

I would not be a buyer of Amazon today because we could see a drop back to $1,500 on post earnings depression. However, I would buy it for a long-term hold. This is a dynamic company with plenty of ideas that will keep them on top with new businesses for the next decade. There are analysts who believe shares will double or triple by 2025. Buy the dip to $1,500 or even $1,400 and then forget you own it. If you watch the big swings in the future, you will be tempted to sell and hate yourself later.


With the Fed out of the picture short-term, the dollar has declined back to support at 95 on the Dollar Index. With expectations for only one rate hike in late 2019, the dollar is losing ground. While that is good for earnings at American companies doing business overseas, it is a pressure in other areas. Our buying power is shrinking. Support at the $94 level is likely to hold as long as the economic numbers continue to improve. Additional employment reports like we saw on Friday will have the Fed coming back to the table with hikes, sooner rather than later.


The falling dollar means a rise in the price of gold. The yellow metal is heading back to resistance at $1,360 and that should equate to about $94 on the Dollar Index. The weak global economy is also prompting gold buying as a store of value.

The prior week the Bank of England refused to give Venezuelan president Maduro $1.2 billion in gold on deposit there. Last week the US stopped a shipment of $850 million in gold (20 tons) from leaving Venezuela headed for the UAE. The threat of sanctions against any person, company, airline or charter jet, caused the deal to blow up before the gold could be loaded. The Russian plane left empty.

In theory, the gold was supposed to be purchased by a company in the UAE for euros in order to provide some liquidity to Venezuela. In reality, many thought Maduro was trying to move his retirement funds out of the country before he leaves the country for good.

The constant headlines about Venezuelan gold helped to support gold prices.


Crude prices rallied back above $55 on news the US had sanctioned oil from Venezuela. US imports fell more than one million barrels per day because it is now illegal to make payments to Venezuela. The sanctions prevent American companies from doing business with PDVSA, the Venezuelan oil company. We normally import about 500,000 bpd from PDVSA.

Venezuela has another problem in selling that oil. The heavy oil must be blended with a lighter oil before it can be refined. Normally that happens in the US but that option is no longer available to PDVSA. If they try to sell the oil to other countries, there are very few refineries that have the capability of processing this heavy crude. That means PDVSA will have to sell it at a steep discount and then wait a month to get paid while the oil is in transport.

Venezuela only exports in volume to three large countries, Russia, China and the USA. The US is the only country that pays for the oil and therefore their only source of hard currency, dollars. China and Russia loaned the country money over the last several years and they are taking oil in place of payments. That means Venezuela, desperately in need of hard cash, cannot send oil to Russia or China because they get nothing in return. The US has crippled the Maduro regime, and this will force a further slowdown in production because there is no place to put the oil and no cash to pay the workers.

Bloomberg reported this weekend there are tankers holding about six million barrels of Venezuelan oil parked in the Gulf of Mexico with no place to go. Eight ships are either parked or heading to a holding pattern.

Kpler tanker tracking



Four days ago, news broadcasts were telling people to turn off all non-essential natural gas appliances and heaters because of low pressure in the lines and insufficient supplies. The Polar Vortex was killing people with sub-zero cold. Three days ago, forecasters predicted a significant thaw for this coming week and natural gas prices crashed to a seven month low.

This drop came with the country still in the grip of winter and gas supplies well below the 5-year average. Gas supplies will probably decline by 10% when reported next Thursday. If we had 2-3 more weeks of significant cold, we could see significant supply shortages. With only 2,197 Bcf in storage and the potential for a -250 Bcf decline next week we are reaching critical levels and prices are crashing. If you want logic you won't find it in the commodity market.




Markets

I don't want to be the writer that cried wolf or the equivalent of Chicken Little, but the Dow and Nasdaq have been up for six consecutive weeks. The Dow has rebounded 3,500 points at the intraday high on Friday. Long lasting "V" bottoms are very rare. Q1 earnings forecasts are about to turn negative. Post earnings depression is coming. By any measure the current rebound is overbought.

The only thing keeping this market positive is the extreme oversold conditions in December and the potential for a China Trade deal. The oversold conditions from December have nearly equalized. We are overdue for a meaningful dip. I am not predicting a 1,000-point decline but simply a decline that last more than a day or two and allows some traders to take profits while portfolio managers get an opportunity to enter positions they missed on the initial rebound.

If I had told you on December 26th to buy everything in sight because the market was going to rebound straight up for the next six weeks you would have thought I was crazy. This kind of V bottom rarely happens.

The trade war with China knocked a lot of points off the market in 2018. It has been a nearly daily pain in the neck with headlines and tweets that increased volatility. October was especially painful. Everyone has bought the dip on the hope of a resolution. The meeting last week was positive, and it appears Trump and Xi will meet at the end of February to sign a major trade agreement. This is the perfect sell the news event. An agreement is already priced into the market. The actual results of the agreement will take months if not years to be felt in the economy. The only immediate part will be a headline about the removal of the tariffs.

The market will likely spike on the announcement and then roll over for lack of other news. March is typically a slow month with investors liquidating positions to raise money to pay their taxes. If an agreement is reached in the last week of February, there may be no headlines left to hold the market up in March.

I really hope that I am wrong on this prediction. We may not make it until the end of February. There is a market adage that says, "As January goes, so goes the year." Since 1957 January has been up 37 times. Of those 37 times the market has been up for the year 32 times. That is a remarkable record with an 86% success rate. However, of those 37 times, February has only been up 55% of the time or 20 years. Basically, a coin toss.

You may remember February 2018. Markets do not have a memory, but humans do, and events tend to repeat. The Nasdaq hit a high on January 29th and nine trading days later it had lost -875 points. The S&P lost -341 points and the Dow -3256. I am not predicting this, but I do think we should pay attention. The Chinese trade deal could keep investors interested in the market but once it has been announced, there may not be another carrot to chase. Add in the potential for Q1 earnings forecasts to turn negative and that is an added incentive to be cautious.


The S&P finally made it through the resistance at 2,650 and closed just over resistance at 2,700. The 100-day average at 2,710 is current resistance but the 2,700 level is still in play. The next 100 points could be tough, but the 2800-2815 level is the clear target and that will be the next goal.


The Dow closed positive solely on the strength of the earnings winners from Friday. Chevron, Exxon and Merck added 57 points and Wednesday's winner Visa added 34 points. Note that prior winners from several days ago, CAT, MCD, MSFT and MMM were at the bottom of the list with post earnings depression.

The Dow gain of 64 points was just enough to close the index over 25,000 and the 100-day and 200-day at 24,986. If the Dow can hold these gains over those levels, it would be very bullish. Should it drop back below 25,000 the round number resistance would gain strength. I believe Disney is the only Dow component to report next week.



Amazon was the big drag on the Nasdaq with the $92 decline erasing 37 points from the Nasdaq index. It was the only stock to trade with a double-digit gain or loss. The index has round number resistance at 7,300 and the high for the day was 7299.94. You cannot get much closer than that.

The 10% correction level is 7,298 and the 100-day at 7,281. Alphabet (GOOGL) is the big dog reporting on Monday and they are expected to beat estimates. Whether the stock will rally is of course unknown. Since there are two $1,100 Google stocks, their earnings impact is doubled. Every $1 move in the stock is worth about a quarter of a Nasdaq point. A $12 move in each stock ($24) would be the equivalent of 6 points on the Nasdaq. A $10 move in Amazon is worth 4 Nasdaq points.



The Russell 2000 finally pushed through resistance at 1,493 and even closed over 1,500. However, there is a real blockade at 1,520 where multiple resistance levels converge. With small cap earnings still a week away there may be enough interest to keep the index moving higher to that 1,520 level.


I probably do not need to write a summary paragraph today because I made my feelings known. However, those are just my concerns and they have nothing to do with the market. I could be entirely off the mark. I would simply like everyone to understand what could happen and be aware. If it does not happen, I am sure everyone will be thrilled with another week or two of gains.

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Enter passively and exit aggressively!

Jim Brown

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Alexis de Tocqueville 1835.


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New Plays

Raised Guidance

by Jim Brown

Click here to email Jim Brown
Editor's Note

In a sector where trouble is brewing this company raised guidance. Radius also bragged about two drugs with blockbuster potential.

 

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


NEW BULLISH Plays

RDUS - Radius Health - Company Profile

Radius Health, Inc., a biopharmaceutical company, develops and commercializes endocrine therapeutics in the areas of osteoporosis and oncology. The company markets TYMLOS for the treatment of postmenopausal women with osteoporosis. It is also developing abaloparatide transdermal patch, a short-wear-time patch formulation of abaloparatide that is in Phase III clinical trial to treat postmenopausal women with osteoporosis; RAD1901, a selective estrogen receptor down-regulator/degrader, which is in Phase I clinical trial for the treatment of metastatic breast cancer; and RAD140, a non-steroidal selective androgen receptor modulator that is in Phase I clinical trial to treat breast cancer. The company has collaborations and license agreements with 3M; Ipsen Pharma SAS; Eisai Co. Ltd.; Duke University; and Teijin Limited, as well as research and development agreements with Nordic Bioscience Clinical Development VII A/S. Radius Health, Inc. was founded in 2003 and is headquartered in Waltham, Massachusetts. Company description from FinViz.com.

A week ago Radius took advantage of the JP Morgan Healthcare Conference to raise guidance for the full year 2018. Sales of their lead drug, Tymlos, surpassed the upper range of $95-$98 million. This is for osteoporosis in postmenopausal women. This is the only anabolic drug in the US market that is increasing its market share. Share rose from 20% at the beginning of 2018 to 27% at the end of the year. In December, market share of new anabolic patients was 40%.

They announced an accelerated late stage clinical pipeline for two drugs with blockbuster potential ($1 billion a year). These are elacestrant (breast cancer) and abaloparatide-patch (osteoporosis in postmenopausal women.)

For the full year 2019 they expect revenue of $155-$175 million and year-end cash of more than $100 million.

Earnings February 28th.

Since the JP Morgan conference three weeks ago, Radius has moved steadily higher. If shares can move over $20 the rally should accelerate.

Buy RDUS shares, currently $18.67, stop loss $16.95.
Optional: Buy March $20 call, currently $1.00, stop loss $16.95.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Step by Step

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index only posted a minimal gain but it was still a 2-month high. Friday could have easily been a market decline given the post earnings depression from recent reporters and weekend event risk. Instead the Nasdaq was the only loser thanks to a $92 drop in Amazon. This is a positive sign for the Russell to be positive on a Friday after a big gain.



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


VXXB - VIX Futures ETN
The short position was entered at the open.

SNCR - Synchronos
The long position was closed at the open.



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

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


BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Continued rally to a 4-month high.

Original Trade Description: Jan 19th.

Box, Inc. provides a 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.

Position 1/22/19:
Long BOX Shares @ $19.74, see portfolio graphic for stop loss.
Optional: Long March $21 Call @ $1.00, see portfolio graphic for stop loss.



INFN - Infinera - Company Profile

Comments:

Major 17% spike on absolutely no 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

Comments:

Nuance completed the sale of its document imaging division to Kofax for $400 million. This allows Nuance to focus more on its AI and cloud based business.

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.



SFIX - Stitch Fix - Company Profile

Comments:

No specific news. Minor decline on no news. Resistance battle still underway.

Original Trade Description: Jan 23rd.

Stitch Fix, Inc. sells a range of apparel, shoes, and accessories through its Website and mobile app in the United States. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags for men, women, and kids under the Stitch Fix brand. The company was formerly known as rack habit inc. and changed its name to Stitch Fix, Inc. in October 2011. Stitch Fix, Inc. was founded in 2011 and is headquartered in San Francisco, California. Company description from FinViz.com.

Stitch posted Q3 earnings in early December of 10 cents compared to estimates for 3 cents. Revenue rose from $295.6 million to $366.2 million and beat estimates for $358 million. They guided for Q4 for revenue of $360-$368 million. Analysts were expecting $363 million.

Shares sank because the expected growth was nearly flat. The company said it was changing its focus to quality long term customers rather than short term customers that are more costly. This is a great move but short sighted investors sold the stock.

They want to move away from customers that continually return everything in their box creating headaches for the company. They want to keep customers that actually buy some or all of the items in their box because that generates the profits. They don't want to add customers at a breakneck speed just to please analysts.

Shares rebounded from the December earnings drop and market crash to a two-month high on Friday. This week has seen a pullback, which could be an entry point.

Position 1/24/19:
Long SFIX shares @ $21.82, see portfolio graphic for stop loss.
Optional: Long March $23 call @ $1.88, see portfolio graphic for stop loss.



SNCR - Synchronoss Technologies - Company Profile

Comments:

No specific news. We closed the position at the open for lack of forward progress.

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:
Closed 2/1: Long SNCR shares @ $6.75, exit $7.15, +.40 gain.
Optional:
Closed 2/1: Long March $7.50 call @ 60 cents, exit 55 cents, 5 cent loss.



YRCW - YRC Worldwide - Company Profile

Comments:

YRCW did not decline today. The minor gain after an earnings miss is unusual. I am dropping the long put position as a loss but I would not close it. Just because YRCW did not decline today does not mean it will not fall next week. It is not worth closing for the current price of 3 cents. Miracles do happen. Hold it until expiration.

Original Trade Description: Jan 26th.

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, 2017, this segment had a fleet of approximately 7,600 tractors comprising 5,900 owned and 1,700 leased; and 30,900 trailers consisting of 23,800 owned and 7,100 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 consisting of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, newpenn.com, and reddawayregional.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,500 tractors, including 4,700 owned and 1,800 leased; and 13,700 trailers comprising 10,500 owned and 3,200 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 has a problem with earnings reports. They either gap up or gap down immediately afterwards. Their performance has been so spotty on earnings there is no accurate expectation of what they will report.

The stock is cheap at $5.75. Over the last two weeks shares have risen to that level from the December market crash and have plateaued there with no further movement. For any normal stock this would appear to be staging for a post earnings breakout.

Since the options are so cheap, I am recommending a combination play where we buy a cheap option on either side of the stock price and hope for a strong move in either direction.

Earnings Thursday January 31st.

Update 1/31: YRCW reported earnings of 6 cents that missed estimates for 12 cents. That was still a 50% increase from the year ago quarter. Revenues of $1.25 billion beat estimates by a fraction. Shares spiked to $7.26 at the open before fading back to $6.

I messed up on this position. I recommended the position with no stop losses on either side. However, somewhere in the transposition to the portfolio graphic I inadvertently added a $6.65 stop loss to the call. That means we were stopped out of the call side at the open. Even though it was not supposed to be there, I have to take the exit because that is what was in the newsletter.

The long put has no value today but YRCW missed estimates. If the market was not so bullish, we could have seen the stock head back towards the lows. I am recommending we keep the put and see if the recent gains begin to erode.

Position 1/28/19:
Closed 1/31: Long Feb $6 call @ 40 cents, exit $1.10, +.70 gain.
Long Feb $5 put @ 25 cents, no stop loss.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

The new position on VXXB was entered at the open and today was a choppy market so we did not get any decline.

Original Trade Description: Nov 17th.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN 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 ETN. 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, the prior VXX ETN had done five 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 VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. 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 may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 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.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.