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Newsletter

Daily Newsletter, Saturday, 3/30/2019

Table of Contents

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

Market Wrap

Thus Endeth The Quarter

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The first quarter ended on a high note and that's a good sign. When the first quarter is good the rest of the year is usually pretty good too. This means the S&P 500 is likely to end the year at this level or higher, what it doesn't mean is that the market will keep moving up the rest of the year. The stock market has been in a giant, secular, rotation and I don't think that is over. As optimistic as the equities market is there is a lot of uncertainty and slowing growth is still a major theme.

Market Statistics


Trade is the #1 source of market uncertainty and trade relations with China are at the top of the list. With Mnuchin and Lighthizer in China this week I'm surprised there weren't more headlines on Friday. Regardless, the latest developments include China's 'historic' concessions on tech, Premier Li Keqiang's pledge to open China's financial markets, and comments from the Treasury Secretary to the effect his working-dinner with Vice Premier Liu He was productive. These events are positive, they point to a deal but still aren't yet a deal. Kudlow says the market shouldn't be focusing on a timeline, it could be weeks or months, and I think he's right.

In other trade news, the U.S. has still not reached a deal with the EU and the USMCA is yet to be ratified. A Trans-Atlantic trade deal is expected by the end of the year, the USMCA will get approved when Congress gets around to it. Because the USMCA still faces opposition it won't likely pass before late summer.

The yield on the 10-year Treasury fell to it's lowest level in years and inverted the yield curve for the first time in a decade. This is a warning sign of possible inflation but more a symptom of the environment than a cause of a recession. The signal it's flashing is a warning, a warning to the market and to world leaders that a recession is inevitable if trade relations can't be normalized. Until then the status quo reigns supreme and in that paradigm, the U.S. and global growth slow but remains positive well into the future.


The final revision for Q4 GDP came in a hair light at 2.2%. That, along with some light data this quarter, points to further slowing in the first quarter. The Atlanta Fed's GDPNow estimate concurs with this outlook but it has been rising over the past few weeks. The latest revision, Friday, March 29, has 1st quarter GDP near 1.75% and climbing. If this figure continues to climb, and the actual results come close to the estimate, the FOMC's 2.1% target for the year could be light.


Inflation data continues to remain tame. Last week we got the January read on PCE prices and they grew at a much weaker 1.4% than expected. At the headline level, consumer-level inflation has made a sharp retreat from its June 2018 high while core consumer inflation has subsided a bit less. Either way, you look at it though, consumer-level inflation is well below the FOMC's 2.0% target and does not indicate a need for a rate hike. If anything the consumer inflation data suggests the FOMC should cut rates.

Not surprisingly, Trump supporters like Larry Kudlow are calling for the FOMC to cut rates immediately. I doubt the FOMC will listen to the White House on this matter but they will likely cut rates before the end of the year unless the trajectory of inflation changes. According to the FedWatch Tool, Fed Futures are pricing in a near 70% chance rates will be cut by December.



The Economy

Last week's economic calendar wasn't too exciting. The labor data, jobless claims, shows flattening in the trend as labor market tightening stabilizes. The labor data may be throwing off a warning but for now, all looks well but I don't expect much more in the way of improvement. The market is still strong, wage gains are still good, but the days of tightening may be behind us.

In other data, the housing data was mixed but I will say mixed with signs this year could be a good year for the home builders. The existing sales, permits, and starts data was all a bit on the light side but mortgage apps and new homes sales were reported at 667,000. This is 4.9% above January's figure, 0.6% higher YOY, and the highest level in nearly a year. With mortgage apps hitting all-time highs (driven by lower interest rates) and growing strongly week over week for over a month we may see permits and starts improve, and new homes sales soar as pent up demand is unleashed.


Next week's economic calendar is a little fuller. Being the start of the new month we'll get the labor-bundle which includes the ADP report, the Challenger report on planned layoffs, weekly jobless claims, and the NFP/unemployment/hourly wages. Along with this are the ISM services (employment index included), durable goods/core capex, construction spending, and retail sales. Most of the data is for February, some are for March, all is for the 1st quarter, and all are important in light of their impact on labor markets, the consumer, and general economic activity in the U.S


The earnings outlook is still in transition but it looks like, once we get past the first quarter, things will brighten up considerably. The first quarter estimate fell another -0.20% in the last week putting it at 3.9%. At this level, the best we can expect is for the final rate to be about 0.0% unless the S&P 500 pulls out some big surprises. So far 20 companies in the index have reported and the results are about average, 17 have beaten EPS consensus and 11 have beaten revenue consensus. The companies with the most exposure overseas will have the worst showing while those with the least the best, a situation likely to cause volatility and spark rotation.


Looking forward there are a couple of positives to keep in mind about earnings growth and this cycle's results. The first is that the 1st quarter is going to be the bottom of the earnings slowdown. After this quarter growth is expected to resume expansion and acceleration. The outlook for the 2nd quarter is still dangerously close to 0.0% and in danger of turning negative but, so long as it stays above 3.5% or so we can safely assume it will be positive when the smoke clears.

From that point on, post 2nd quarter cycle, earnings growth is expected to accelerate over the 4 to 6 quarters topping out above 12%. Estimates for future quarters, specifically in 2019, have weakened considerably from their highs but have stabilized in recent weeks which is a good sign. Along with that, the estimates for 4th quarter growth went up an average 0.2% over the past week which I think is a really good sign. The risk is that 1st quarter results will weigh on the outlook, if that happens stock prices could suffer. At current prices, the S&P is trading just shy of the 5-year P/E and about as highly-valued for the past 5 years, if the outlook for earnings growth takes a beating, stock prices could easily correct to the December lows.


The Gold Index

Gold prices fell pretty hard this week after testing resistance repeatedly along the 2019 uptrend line. The spot price gave up nearly -1.75% and broke through the $1,300 level in the process. The metal may be heading down to set new lows but support is likely near $1,280. One reason for gold's fall is this week's strengthening dollar but that support may be short-lived; the dollar is looking pretty range-bound with central banks around the world, including the FOMC, ratcheting down their 2019 growth outlooks one bank at a time. A break below $1,280 would be bearish for gold and may fall to $1,250, $1,225 and $1,200 in the near to short-term.


The Gold Miners ETF also fell in the last week shedding about -1.60%. The ETF didn't make it all the way to $23.50 before correcting and shows strong resistance at a lower level than before. The indicators are consistent with a peak in prices and suggest correction or consolidation will continue in the near to short-term. My targets for support are $22.00 and $21.50, a break below $21.50 would be bearish otherwise I expected range-bound trading.


The Oil Index

Oil prices moved higher this week despite fear of slowing global growth and demand worries. The OPEC tightening scheme, Russia's commitment to aid OPEC, sanctions against Iran and Venezuela, Venezuela's electricity problem were compounded by news from the U.S. The EIA says U.S. production edged lower in January, still 11.87 million barrels per day but lower, and Baker-Hughes says the rig count fell which are both bullish for oil prices. WTI spent most of the week within its near-term range but broke out on Friday to set a new high. The indicators are bullish and gaining strength so I do expect to see oil prices continue to rise.


The Oil Index did not move higher on Friday or for the week, really. The weekly candle is green with a long upper shadow showing resistance is still fierce at the 150-day EMA. The EMA may cap gains in the near-term but, with oil prices on the rise and earnings season at hand, I expect the outlook for earnings growth to rise and the index to rise with it. A break above 1,320/1,325 is the trigger I am looking for, once that is broken moves to 1,400 and 1,500 look likely.


In The News, Story Stocks and Earnings

Carmax was among the week's best performers after releasing earnings on Friday morning. The used-car dealer was able to post 5.9% YOY revenue growth despite a slowdown in auto markets. Revenue of $4.32 billion was shy of estimates but that didn't matter, pricing and conversion led to better than expected margins which more than offset the difference. EPS of $1.13 beat consensus by $0.10 and, along with plans for 2019, helped push the stock up 10% by the end of trading. The company is expecting to increase its Capex spending this year, open 13 new stores this year and next, and roll out the omnichannel experience to most customers by the end of next year.


Wells Fargo had an active on Friday after the announced retirement of Tim Sloan. Sloan has been with the bank for more than three decades and took over as CEO after the bogus-bank-account scandal in 2016. He says his retirement is effective June 31st but he's stepping down as CEO and board member immediately. Shares of the stock initially surged on the news but uncertainty outweighed any benefit the company may see. Wells Fargo says it will look outside the company for its new CEO. A flurry of up and downgrades followed the announcement, all citing how a new CEO from outside the company will help with regulatory issues. Those downgrading the stock say fundamental weakness makes it an inferior investment. Shares opened on Friday with a small gap and then fell hard to close with a loss of -1.5%.


Shares of Boeing have begun to move higher following the crash-induced correction. The stock advanced nearly 2.0% on Friday and set an almost-three-week high in the process. The company has a tentative agreement with the FAA on a fix for the anti-stall issue at the root of the 737 MAX problem. While a fix is good news for the future of 737 sales it does not protect the company from civil liability. The first of what are sure to be many lawsuits pertaining to the Ethiopa Air crash have already been filed and could cost the company billions.


The VIX moved lower on Friday and may move lower, but I still don't like the way it looks. The pattern traced out during March is a sign to me that something is up in the market and I am not sure what it is. At current levels, the index is consistent with rising index prices for the S&P 500 but there is a support target very close to Friday's low that could spark a rebound for fear. This level is near 13.40 and if confirmed as support could lead to a sharp increase in a near-term kind of way. A fall to new lows would be bullish.


The Indices

Despite my apprehensions, the indices had a good week; all the major indices were able to post gains and one posted gains above 3.5%. Even so, no index posted a new high and all show signs of resistance at established resistance targets.

The Dow Jones Transportation Average posted the largest weekly advance at 3.54%. The transports formed a strong weekly candle moving up from the 10,000 resistance. The move looks bullish and confirms support at a key level but met resistance near 10,450 where it has failed to advance for the past three weeks. The indicators are mixed, momentum is bullish but stochastic is moving lower following a bearish crossover, so the best I would expect in the next week is more sideways action with a possible test of resistance at or just above 10,450.


The Transports look a little better on the daily chart but only just. The index is moving up off of support and is supported by the indicators although the signal is less than perfect. While stochastic is firing what I would call an almost strong bullish crossover the index is still below resistance and MACD has yet to confirm. The upward movement could continue and surpass 10,450 but 10,500 and 10,650 are resistance targets that also need to be overcome.


The Dow Jones Industrial Average posted the second largest advance with a gain of 1.67%. The blue-chip index created a medium-sized weekly candle if you count the small gap that formed with Monday's open. The candle is moving up from support but the move doesn't look strong. The indicators are mixed, consistent with a peak, and suggest choppy range-bound trading in the near-term. If I were more bullish I might say they were set up to fire signals that would indicate a continuation of the V-Bottom rally. In the near-term resistance is at 26,000 and may cap gains. A move above that would be bullish but face additional resistance at the all-time high.


The blue-chips daily chart is likewise bullish but in a way that looks suspicious. The indicators are mixed and do not confirm last weeks advance which, along with the presence of resistance suggests range-bound trading. The index may continue to move higher but I'd like to see it close above 26,000 and more like 26,200 before getting bullish.


The S&P 500 advanced 1.20% in the last week forming a green candle to the side of several weeks price action. The index looks like it could go higher but choppy day to day action and the indicators suggest a top is forming. The indicators are consistent with consolidation if not correction and point to more sideways trading in the absence of market-moving news. If the index is able to move higher I would not chase prices, the next targets for resistance are very close at 2,875 and the all-time high.


The S&P 500 daily charts look about the same. The index is drifting higher but indications of weakness persist. The indicators are not bullish on this chart, at best stochastic shows a bounce from support within downtrend while MACD hovers in bear territory. If the index does move higher I would expect for resistance in the range of 2,850 to 2,875 to be strong.


The NASDAQ Composite gained 1.13% in today's trading. The tech-heavy index created a medium-sized green candle that, not counting last week's long upper shadow, forms an outside day pattern. This pattern is a sign of market exhaustion which is what I'm seeing in chart after chart. A move higher is possible but it would likely be the last gasp of the Vee-Bottom reversal that began in December. If the outside day is confirmed, a move to 7,500, 7,350 and 7,000 is possible.


The NASDAQ Composite bounced up on Friday but formed a weak candle within the recent consolidation range. It may move higher but the indicators are not bullish and resistance at 7,800 looks strong. A move above 7,800 could be bullish but if so, see paragraph above.


The market may move higher next week but that will depend on the news. The most important news will be on trade, after that bond rates maybe, and then economic data for sure. Regardless, there are a lot of reasons for the market to make some wild, possibly knee-jerk, moves in the next week so extra caution is a good idea. I still think the economy is fundamentally sound but the market is getting to be highly valued in a time of uncertainty. I remain firmly bullish for the long-term, we'll get a trade deal (maybe this year) and the global economy will continue to expand. In the near-term I think there is an underlying weakness in the market tied to earnings and signs of slowing economic growth so I am neutral, leaning toward bearish.

Remember, a hot first quarter usually means the year ends strong too, but it doesn't mean the market moves straight up all year. The major indices are up about 20% for the year and ripe for profit-taking.

Until then, remember the trend!

Thomas Hughes


New Plays

Overcoming Earnings

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes earnings reports can show growth but still be disappointing. VipShop crashed after earnings but almost immediately analysts began raising their estimates.

 

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


NEW BULLISH Plays

VIPS - Vipshop Holdings - Company Profile

Vipshop Holdings Limited operates as an online discount retailer for various brands in the People's Republic of China. It operates in two segments, Vip.com and Internet Finance Business. The company offers women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories that include belts, jewelry, watches, and glasses for women and men. It also provides handbags, which comprise purses, satchels, duffel bags, and wallets; apparel, gears and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers; sports apparel, sports gear, and footwear for tennis, badminton, soccer, and swimming; and consumer electronic products, including computers, mobile handsets, digital cameras, and home appliances. In addition, the company offers skin care and cosmetic products, such as cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish; and home furnishings comprising bedding and bath products, home decors, dining and tabletop items, and small household appliances. Further, it provides designer apparel, footwear, and accessories; and snacks and health supplements, and occasion-based gifts. Additionally, the company offers Internet finance services, which comprise consumer and supplier financing, and wealth management services. It provides its branded products through its vipshop.com, vip.com, and lefeng.com online platforms, as well as through its cellular phone application. Additionally, the company offers warehousing, logistics, procurement, research and development, consulting, and software development and information technology support services. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

Earnings May 22nd.

In late February, the company reported earnings of 19 cents that beat estimates for 18 cents. However, revenue of $3.80 billion missed estimates for $3.96 billion. The 8.1% rise in revenue was down from a 16.4% rise in the prior quarter. The CEO said the weak quarter was the result of the company shifting some low margin categories from the "first-party business" and into the "marketplace platform." He said the move would result in a positive improvement in earnings beginning next quarter. For the current quarter they were only targeting 1-5% revenue growth and analysts were expecting 11.6%. The CEO cautioned that revenue growth was not the metric to worry about. The company is now focused on increasing profits rather than increasing revenue at any cost.

Zacks reiterated a buy rating saying earnings estimates had risen 5.9% over the last 60 days which includes the post earnings commentary. VIPS only has a 9.7 PE compared to 29.4 for the rest of the industry.

After the Zacks comments on the 25th the stock began escalating sharply and closed at an 8-month high on Friday. The stock is now over the 50, 100 and 200 day averages.

Buy VIPS shares, currently $8.03, stop loss $7.25.
Optional: Buy August $9 call, currently 75 cents, stop loss $6.85.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Role Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

Big caps lifted the market on Friday and small caps fizzled. The Dow almost rebounded to the 26,000 level and the S&P blew though the resistance at 2,815. Unfortunately, the Russell gained only 4 points and remains under 1,550 and well below 1,566. Downtrend resistance is still intact. I would really hate to see the Russell lose traction here and form yet another lower high but it appears the excitement is fading.



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



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


BULLISH Play Updates

HAIN - Hain Celestial - Company Profile

Comments:

No specific news. Shares have now declined for a couple days after a month of gains. There has not been any additional insider buying since the 7th. I tightened the stop loss.

Original Trade Description: March 2nd.

The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products. The company operates in seven segments: the United States, United Kingdom, Tilda, Ella's Kitchen UK, Canada, Europe, and Cultivate. It offers infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; plant-based beverages and frozen desserts, such as soy, rice, oat, almond, and coconut; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, and cereal bars; canned, chilled fresh, aseptic, and instant soups; yogurts; chilies; chocolates; and nut butters. The company also provides juices, hot-eating products, desserts, cookies, crackers, frozen fruits and vegetables, pre-cut fresh fruits, refrigerated and frozen plant-based meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads, jellies, honey, marmalade products, and other food products. In addition, it offers snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla and whole grain chips, pita chips, and puffs; personal care products consisting of skin, hair, and oral care products, as well as deodorants, baby care items, body washes, sunscreens, and lotions; and herbal, green, black, wellness, rooibos, and chai tea. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and clubs, and drug and convenience stores in approximately 80 countries worldwide. The Hain Celestial Group, Inc. was founded in 1993 and is headquartered in Lake Success, New York. Company description from FinViz.com.

In early February Hain posted earnings of 14 cents that missed estimates for 25 cents. Sales declined -5% to $584.2 million and missed estimates for $611 million. All of the guidance was terrible. Shares fell 20% on the news.

Shares began to rebound almost immediately. The company announced an investor day for February 28th and it was well received. Two analysts posted positive notes about the company the following day.

The most bullish event was a four million share purchase in the open market but the biggest shareholder, Engaged Capital. Director Glenn Welling has purchased five million shares since the analyst meeting and both entities were still buying on Thursday. I see a potential takeover play ahead or at the least and activist shareholder play. Shares are exploding higher on the active buying.

Earnings May 9th.

Update 3/15: Shares are still rising but there has not been any additional insider buying since March 7th when Glenn Welling bought 1.8 million shares and Engaged Capital also bought 1.8 million. Those two entities bought 7,949,822 shares in the week ended on Mar-8th at an average price of $20.25. That is $160 million in new purchases Engaged now owns about 15%.

Position 3/11/19:
Long HAIN shares @ $21.44, see portfolio graphic for stop loss.
Optional: Long May $23 call @ $1.00, see portfolio graphic for stop loss.



IMMU - Immunomedics - Company Profile

Comments:

No specific news. Excellent rebound from the dip to support.

Original Trade Description: March 16th.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, develops monoclonal antibody-based products for the targeted treatment of cancer. Its advanced antibody-drug conjugates are sacituzumab govitecan and labetuzumab govitecan, which are in advanced trials for various solid tumors and metastatic colorectal cancer, respectively. The company focuses on commercializing sacituzumab govitecan as a third-line therapy for patients with metastatic triple-negative breast cancer in the United States. The company also develops IMMU-140, a humanized antibody directed against an immune response target. Its other product candidates include products for the treatment of cancer and autoimmune diseases, including epratuzumab, an anti-CD22 antibody; veltuzumab, an anti-CD20 antibody; milatuzumab, an anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. Immunomedics, Inc. has clinical collaboration with AstraZeneca and MedImmune, to evaluate Imfinzi, a human monoclonal antibody against PD-L1, with sacituzumab govitecan as a frontline treatment of patients with TNBC and urothelial cancer; collaboration agreement with The Bayer Group for the development of epratuzumab; clinical and preclinical collaborations with academic cancer institutions, identifying new cancer indications for sacituzumab govitecan and the biology of the Trop-2 antigen; and research collaboration with the Memorial Sloan Kettering Cancer Center to investigate Sacituzumab Govitecan and Labetuzumab Govitecan in preclinical cancer models. Immunomedics, Inc. has a partnership agreement with the Samsung BioLogics Co., Ltd. to manufacture hRS7, an Immunomedics proprietary humanized antibody. The company was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics has had a rocky year but they are starting to pull out of their funk. On February 26th they reported earnings but more importantly announced a complete changing of the guard with new board members, new CFO and the exit of the CEO. Shares spiked on the news.

On March 11th they presented at the Cowen and Company 39th Annual Health Care Conference. Shares spiked again. Investors apparently liked what they heard.

They have multiple drugs in the FDA approval process and several more in the research stage. Sacituzumab govitecan has demonstrated a significant clinical benefit in multiple hard-to-treat cancer settings including breast cancer. The company is currently preparing a new Biologics License Application (BLA) in response to the recent CRL from the FDA. They recently published in the new England Journal of Medicine regarding that drug in the treatment of a variety of epithelial cancers.

The company had $497 million cash on hand and enough for an additional two years of research and operations.

Earnings May 27th.

Shares have accelerated to the upside after the earnings and investor presentation.

Position 3/18/19:
Long IMMU shares @ $18.56, see portfolio graphic for stop loss.
Optional: Long May $21 call @ 75 cents, see portfolio graphic for stop loss.



XON - Intrexon Corp - Company Profile

Comments:

No specific news. Shares still holding over support at $5.

Original Trade Description: March 13th.

Intrexon Corporation engage in the engineering and industrialization of biology in the United States. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components. It provides reproductive technologies and other genetic processes to cattle breeders and producers; biological insect control solutions; technologies for non-browning apple without the use of artificial additives; genetically engineered swine for medical and genetic research; commercial aquaculture products; and preservation and cloning technologies. The company also offers UltraVector platform that enables design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells; and RheoSwitch inducible gene switch that provides quantitative dose-proportionate regulation of the amount and timing of target protein expression. In addition, it provides AttSite Recombinases, which allows stable, targeted gene integration and expression; LEAP automated platform to identify and purify cells of interest, such as antibody expressing cells and stem cells; ActoBiotics platform for targeted in situ expression of proteins and peptides from engineered microbes; and AdenoVerse technology platform for tissue specificity and target selection. The company serves the health, food, energy, and environment markets. Intrexon Corporation has collaboration and license agreements with ZIOPHARM Oncology, Inc.; Ares Trading S.A.; Oragenics, Inc.; Intrexon T1D Partners, LLC; Intrexon Energy Partners, LLC; Intrexon Energy Partners II, LLC; Genopaver, LLC; Fibrocell Science, Inc.; Persea Bio, LLC; OvaXon, LLC; S & I Ophthalmic, LLC; Harvest start-up entities; and others. The company was formerly known as Genomatix Ltd. and changed its name to Intrexon Corporation in 2005. Intrexon Corporation was founded in 1998 and is based in Germantown, Maryland. Company description from FinViz.com.

Intrexon reported a loss of 22 cents that beat estimates for 29 cents. Revenue of $43.2 million declined 44% and missed estimates for $62 million. It was not a good report.

The company's primary revenues come from collaboration and licensing along with some product and service revenues. Collaboration and licensing revenues declined 55% to $25.2 million. These revenues can be very sporadic which means some earnings reports can be ugly. However, the auditor is considering a "going concern" statement in the financials.

The company has $224 million in cash on hand and multiple streams of cash flow from these collaboration and licensing efforts. The CEO said there were multiple efforts underway to develop new revenue streams.

Last week, Bill Miller, of Miller Value Partners, a $2 billion investment fund, tweeted that current efforts underway could make the company worth many multiple of the current stock price. Shares began to rebound from the post earnings beating.

On March 8th, AquaBounty (AQB) a wholly owned subsidiary of XON, received permission from the FDA to import fish eggs from Canada and raise salmon in Indiana. I do not understand what is special about these eggs but shares of AQB spiked sharply.

I am recommending we follow Bill Miller and see if this inexpensive stock can at least return to the pre earnings levels.

Update 3/20: Subsidiary AquaBounty (AQB) priced a secondary offering of 3,345,282 shares at $2.25 per share to raise $7.5 million. This has no impact on XON.

Position 3/14//19:
Long XON shares @ $5.61, see portfolio graphic for stop loss.
Optional: Long July $6 call @ $.95, see portfolio graphic for stop loss.



BEARISH Play Updates

GME - Gamestop - Company Description

Comments:

No specific news. Earnings coming on Tuesday. We are holding over.

Original Trade Description: March 23rd.

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands. The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software. It also sells wireless products, services, and accessories; collectibles, such as licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes; gaming-related print media, and mobile and consumer electronics products; PC entertainment software in various genres comprising sports, action, strategy, adventure/role playing, and simulation; and carry strategy guides, magazines, and interactive game figures. In addition, the company operates e-commerce sites under the GameStop, EB Games, Micromania, and ThinkGeek brands; collectibles stores under the Zing Pop Culture and ThinkGeek brands; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores. Further, it provides Game Informer magazine, a print and digital video game publication; and operates Simply Mac, an authorized Apple reseller that sells Apple products, including desktop computers, laptops, tablets and smart phones, and related accessories and other consumer electronics products, as well as training, warranty, and repair services. As of March 28, 2018, the company operated approximately 7,200 stores across 14 countries. It primarily operates its stores under the GameStop, EB Games, and Micromania brands. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is headquartered in Grapevine, Texas. Company description from FinViz.com.

Gamestop is headed to the same fate as Blockbuster. Gamestop sells preowned game consoles and video games. With Google announcing Stadia where all games are browser based and run on any device and computing power is not important, this is a major hurdle for Gamestop.

Microsoft announced a similar fate with plans on moving the Xbox to the cloud, called Project XCloud, and there will be no game consoles or game CDs.

With these two giants eliminating the hardware and software that is resold by Gamestop, this company is in a world of trouble. They do sell other products but consumers come into their stores for the games. With 7,200 stores they have a lot of overhead and their biggest revenue items are disappearing.

Granted, this will not happen overnight. These game conversions to the cloud will take months to take hold and many months to become the majority of market share. However, investors will see the future, with Blockbuster a prime example, and Gamestop shares are going to bleed value in the months ahead.

Earnings April 2nd. Normally we would not take a position in front of earnings but there will be analyst questions about the path of progress. The answers may be hard for investors to handle. I am recommending we own a put and hold it over the earnings report.

Position 3/25/19:
Long May $10 put @ 65 cents. see portfolio graphic for stop loss.



VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

A -3% decline in a positive market but not yet back to the March lows.

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.