Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/10/2019

Table of Contents

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

Market Wrap

Priced In

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Economic Data, the FOMC, and Trade News failed to move the market. Dare I say it? It looks like economic conditions, the FOMC, interest rates, and the trade deal are priced into the indices. That leaves only one thing and that is earnings. With the peak-season due to begin in two days, there is a lot riding on what could be, is likely to be, the worst quarter of earnings growth in two years.

Market Statistics


On the economic front, the CPI Consumer Price Index was mixed. Headline inflation was hotter than expected and rose the most in one month in over a year. Balancing that was a core-reading stripping out food and energy that shows inflation is still rising at only a tepid rate. This at once suggests the FOMC may have to raise rates later this year while reinforcing the need for patience, nothing new in that.

The FOMC minutes were released this afternoon and they did not give up any new insights either. The Fed, in their discussion, left the door open to future rate hikes with comments to the effect 'patience' does not preclude 'data dependent'. If the data says hike rates the rates will go up. A few members see possibility rates will need a modest increase by the end of the year. The majority agree no hikes is the more likely course of action given the evolution of risks and data. The Fedwatch Tool is predicting a 55% chance of rate cut by the end of the year.


Regarding growth, the FOMC says that GDP will bounce back solidly in the second half of the year. They also give themselves a nice pat on the back for that citing their patience as a driving cause. The FOMC's patience is certainly helping the economy to bounce back, the lack of it is also a big reason why the economy slowed in the first place.

The committee also talked about the balance sheet wind-down. They revealed a desire to remove uncertainty as a reason for producing a timetable at the lasts meeting.

Trade talks wear on and progress continues to be made. Treasury Secretary Steve Mnuchin has been in near-constant talks with Liu He and making great progress. According to him, the two sides have just about agreed on the enforcement mechanism which includes enforcement offices to be set up by both sides. Other than that little detail was given other than a desire to end talks quickly. That said, Mnuchin also says there is no timeline and talks will take as long as they take.

In international news, the IMF downgraded its global growth forecast for the second time this year. The IMF says world GDP is going to be 3.3%, down from 3.5%, and possibly will be downgraded again. The downgrade notes downside risks and calls on world leaders to make a coordinated effort to stimulate growth. Reading between the lines the report says world leaders need to get their trade issues worked out.

Economic Calendar

The Economy

The Consumer Price Index was a mixed bag for sure. The headline figure rebound from last month's long-term low in the strongest one-month gain in over a year while core CPI continues to moderate. Headline CPI jumped 0.4% MOM and 1.9% YOY while core CPI rose only 0.1% and 2.0%. Both core and headline inflation are well below the peaks set last year and give little reason for the FOMC to hike rates. This month's increase is due in large part to energy and gasoline, the energy index rose 3.5% and was 60% of the total increase in consumer prices. Tomorrow we'll get the latest read on PPI.


The Dollar Index

The Dollar Index was up down and sideways on today's news. On the one hand, the data and the FOMC are on track for no rate hikes this year, far more dovish than what the market was expecting just a few months ago, while on the other the ECB is also getting dovish. The ECB held rates steady in today's policy announcement and made no changes to their planned TLTRO III. The DXY ended the day slightly lower after experiencing a volatile session. The move stopped short at the short-term moving average where it may find support. Regardless, the DXY is trapped within a trading range and not likely to exit any time soon.


The Gold Index

Gold prices moved up with today's dollar weakness and set a new near-term high. The spot price is moving up from the $1,300 level and looks like it will move higher. The indicators are bullish and rising which is consistent with higher prices but the indications are weak. A move higher may find resistance at $1,320 or, if that is broken, near $1,340. In either case, gold prices will still be range bound.


The Gold Miners ETF moved contrary to the underlying commodity falling in today's action. The ETF shed nearly a full percent in a move suggesting another peak has been reached. This is the 5th peak within the current trading range but may not indicate a price reversal. The indicators are still a bit weak and mixed but basically showing a bullish entry signal that could take the ETF up to the top of the range. If the GDX is able to move up resistance is at $23.00 and $23.50. If not, support is at the short-term moving average and $22.00.


The Oil Index

Oil prices held steady despite bullish inventory data. The level of WTI in storage fell -1.5 million barrels versus an expected rise of 0.20%. Compounding this was a massive -7.7 million barrel decline in gasoline inventories. WTI rose a little more than 0.35% in today's trading and did not set a new high. Despite this, gold looks like it is preparing for another push higher, this time to $68.


The Oil Index moved up in today's trading and confirms support is growing along the short-term moving average. Today's candle doesn't set a new high but does appear bullish and part of a consolidation and continuation of recent trends. The indicators are rising and momentum is bullish so higher prices are expected. Resistance is just above today's high, a break above that would be bullish too. When resistance breaks a move up to 1,400 is expected.


In The News, Story Stocks and Earnings

Delta Airlines announced earnings before the opening bell. The company beat on the top and bottom lines sparking a massive pre-market surge in stock prices that fizzled out during the day. The company says strength was driven by improvements across the operation, higher premium ticket pricing, and savings in maintenance/repair/overhaul. Guidance for the full year was raised but to a wide range around consensus which may have something to do with today's volatility. The stock closed with a nice increase but the candle leaves a lot to be desired.


Bed, Bath & Beyond reported earnings after the bell. The specialty home products retailer says comps fell -1.4% but guidance was strong. Slowing in-store traffic was offset by better than forecast digital sales as company initiatives bear fruit. The CEO says 2019 is going to be a good year because EPS growth is going to stabilize and accelerate. He set full year guidance at $2.12 versus the expected $1.85 and shares jumped 4% on the news.


The VIX fell with today's action but it still doesn't look great. Volatility is low relative to last year's big spikes but still well above the bull market lows and flirting with a reversal. Today's candle retreat to support at 13.30 where fear has had a hard time getting by. This marks the 6th time prices have halted at this level in the last 6 weeks and the indicators are turning bullish. Both MACD and stochastic are mildly bullish now, a move in the VIX above the short-term moving average would confirm the signal they are suggesting. With earnings season set to kick off in two days and a sell-the-news-event brewing with trade, I think the VIX is giving us a warning that should be noted; fear could spike at any minute, and it could be a big one.


The Indices

The indices drifted sideways and did not look very strong about it. Most are sitting near their recent highs, the NASDAQ Composite set a new one. The tech-heavy index created a small green candle with barely visible upper shadow creeping up to set a microscopic new high. The move may be bullish but it looks weak and tentative and the indicators aren't great either. MACD momentum is bullish but very weak and diverging from the 2019 rally while stochastic is high in overbought territory. My misgivings may be overblown but with the all-time so close to hand getting bullish now isn't really worth it anyway. If prices move to set a new high, break to new highs, and hold them we start talking extended rally once again.


The Dow Jones Transportation Average posted the second-largest advance in today's session, about 0.40%. The transports formed a small green candle showing support at the previous high but again, the indicators do not look great. Momentum has diverged from the new high while stochastic is high in the upper signal zone suggesting weakness and overbought conditions. This situation may only lead to consolidation but could lead to full reversal should earnings season not pan out.


The broad market S&P 500 gained about 0.30% in today's trading to form a small green spinning top with upper and lower shadows. The index did not set a new high and does not look particularly bullish despite sitting above support. The indicators are both peaking out with the index and suggest a move to test support is imminent. A move to 2,880 is possible, a move below that level would be bearish at least for the near-term.


The Dow Jones Industrial Average closed with the smallest gain and hardly any gain at all, only 0.02%. the blue-chip index formed a small spinning top doji near yesterday's low and looks like it will move lower. The indicators are both showing bearish crossovers consistent with a pullback or test of support that could move the index down to 26,000 or lower in the near-term.


The indices are giving mixed indications no two ways about it. There are signs the market is peaking but whether that is a near-term peak of consolidation or a longer-term peak of reversal is hard to say. I would expect to see similar action tomorrow, quiet and without much movement, and then a possibility of bigger moves on Friday. JP Morgan and WFC are going to report earnings before the bell on Friday and those are going to be important events. Their results and their outlook will set the tone for the entire season. I am firmly bullish for the long-term but neutral and cautious at least until after Friday mornings earnings reports.

Until then, remember the trend!

Thomas Hughes


New Plays

Size Does Matter

by Jim Brown

Click here to email Jim Brown
Editor's Note

Regardless of the size of the device memory, it is never enough. While that is a common problem in consumer devices it is also a problem in commercial and enterprise applications.

 

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


NEW BULLISH Plays

PSTG - Pure Storage - Company Profile

Pure Storage, Inc. engages in building a data platform that enables businesses to enhance performance and reduce complexity and costs worldwide. The company delivers its data platform through Purity Operating Environment, an optimized software for solid-state memory that offers enterprise-class storage and protocol services; FlashArray and FlashBlade optimized hardware products for solid-state memory to enhance the performance and density of flash, optimize its advanced software services, and reduce solution cost for customers; Pure1, a cloud-based management and support software; and FlashStack and Artificial Intelligence Ready Infrastructure converged infrastructure solutions. Its data platform is used for a range of use cases, including database applications, large-scale analytics, artificial intelligence/machine learning, private and public cloud infrastructure and webscale applications, virtual server infrastructure, and virtual desktop infrastructure; and helps customers scale their businesses through real-time and accurate analytics, increase employee productivity, improve operational efficiency, and deliver compelling user experiences to their customers and partners. The company serves enterprise and commercial organizations, cloud, global systems integrators, and service providers across various set of industry verticals, consumer web, education, energy, financial services, governments, healthcare, manufacturing, media, retail, and telecommunications through a network of distribution and channel partners. The company was formerly known as OS76, Inc. and changed its name to Pure Storage, Inc. in January 2010. Pure Storage, Inc. was founded in 2009 and is headquartered in Mountain View, California. Company description from FinViz.com.

Their memory management products are state of the art and their acquisition of Compuverde will increase those capabilities. Compuverde is a leading developer of file software solutions for enterprises and cloud providers. The combination of the two companies will allow customers to implement true hybrid architectures in on premise or cloud applications or a mix of both.

They reported earnings of 14 cents that missed estimates for 19 cents. However, the miss was due to a breakdown at a contract manufacturer and prevented them from shipping a large number of orders. Revenue still rose 24% to $422.2 million despite missing estimates for $443 because of the supplier breakdown.

Shares dipped on the initial earnings results but have rebounded to six month high. Shares have been consolidating for the last six days but appear to be ready for a breakout.

Earnings May 30th.

Buy PSTG shares, currently $23.29, stop loss $22.45.
Optional: Buy May $25 call, currently $55 cents, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Amazing Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The 19 point drop in the Russell on Tuesday was erased with a 22-point gain today. The Russell rebounded to within 1 point of the Friday close and 6-week high. If we could add to this one-day wonder and catapult over 1,600 it could trigger a strong bout of short covering and price chasing. It is amazing that the Russell can go from very negative one day to very positive the next.

After the bell the UK received another extension on their Brexit date so that wild card is off the table until October.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor


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


BULLISH Play Updates

CY - Cypress Semiconductor - Company Profile

Comments:

No specific news. Holding at recent resistance high.

Original Trade Description: April 5th.

Cypress Semiconductor Corporation designs, develops, manufactures, markets, and sells embedded system solutions worldwide. It operates in two segments, Microcontroller and Connectivity Division, and Memory Products Division. The Microcontroller and Connectivity Division provides microcontroller (MCU), analog, and wireless and wired connectivity solutions, including Traveo automotive MCUs; programmable system-on-chip and general-purpose MCUs; analog power management integrated circuits and energy harvesting solutions; CapSense capacitive-sensing controllers; TrueTouch touchscreens; Wi-Fi, Bluetooth, and Bluetooth low energy; and USB controllers comprising solutions for the USB-C and USB power delivery standards, as well as wireless Internet of things connectivity solutions. The Memory Products Division provides NOR and NAND flash memories, static random access memory (SRAM) products, HyperRAm, synchronous and asynchronous SRAMs, nonvolatile SRAMs, F-RAM ferroelectric memory devices, and other specialty memories and clocks. The company serves various markets, including automotive, industrial, consumer, computation, white goods, communications, handset, PC peripherals, mobile devices, networking, telecommunications, video, data communications, computation, and medical markets. Cypress Semiconductor Corporation sells its semiconductor products through distributors and manufacturing representative firms, as well as through sales force directly to original equipment manufacturers and their suppliers. The company was founded in 1982 and is headquartered in San Jose, California. Company description from FinViz.com.

Cypress makes chips for the Internet of Things or IoT. That has evolved into automotive uses as well as today's cars are connected to the internet in multiple ways. Self-driving cars obviously have more chips but many cars today function as their own WiFi hotspot for the occupants. I am sure the explosion of IoT devices we have seen over the last several years is just the tip of the iceberg for the years to come.

Shares spiked in early February after the company reported earnings of 35 cents compared to estimates for 33 cents. Revenue of $604.5 million also beat estimates for $599 million.

After several days of gains the stock rolled over with the chip sector in early March. Over the last several days shares have rallied to close at a 6-month high on Friday.

Earnings May 7th.

More than 7,800 of these calls were bought on Friday compared to an open interest of only 257. Somebody is betting a lot that the stock will go up. Because of the cheap price we may hold over earnings unless we have a decent profit to protect before they report. We will NOT hold the stock over the earnings.

Position 4/8/19:
Long CY shares @ $15.90, see portfolio graphic for stop loss.
Optional: Long May $17 call @ 40 cents, see portfolio graphic for stop loss.



INO - Inovio - Company Profile

Comments:

Inovio earned a third milestone payment from AstraZeneca for dosing a patient in a phase II study for HPV. No amount was given.

Original Trade Description: April 3rd.

Inovio Pharmaceuticals, Inc., a late-stage biotechnology company, focuses on the discovery, development, and commercialization of DNA-based immunotherapies and vaccines to prevent and treat cancers and infectious diseases. Its SynCon immunotherapy design has the ability to break the immune system's tolerance of cancerous cells, as well as is intended to facilitate cross-strain protection against known, as well as new unmatched strains of pathogens, such as influenza. The company is involved in conducting and planning clinical studies of its proprietary SynCon immunotherapies for human papillomavirus-caused pre-cancers and cancers; bladder cancer; glioblastoma multiforme; hepatitis B virus; hepatitis C virus; human immunodeficiency virus; Ebola virus; middle east respiratory syndrome; and Zika virus. Its partners and collaborators include MedImmune, Limited; The Wistar Institute; University of Pennsylvania; GeneOne Life Science Inc.; ApolloBio Corporation; Regeneron Pharmaceuticals, Inc.; Genentech, Inc.; Plumbline Life Sciences, Inc.; Drexel University; National Institute of Allergy and Infectious Diseases; United States Military HIV Research Program; U.S. Army Medical Research Institute of Infectious Diseases; National Institutes of Health; HIV Vaccines Trial Network; Defense Advanced Research Projects Agency; the Parker Institute for Cancer Immunotherapy; and Coalition for Epidemic Preparedness Innovations. Inovio Pharmaceuticals, Inc. was founded in 1979 and is headquartered in Plymouth Meeting, Pennsylvania. Company description from FinViz.com.

Inovio is developing new cancer treatments that deliver coded DNA to cells so they can create their own antibodies against the invading cancer cells. They have multiple trials in progress and the success of any one trial will catapult INO significantly higher.

The drawback is money. They ended the year with $85.5 million after burning through $69 million in 2018. In February they announced a secondary to raise another $82 million. The secondary was convertible notes at $5.38 in 2023. Since that is almost a slam dunk deal, investors trashed the stock because of the 17% dilution in 2023. I think that is very short sighted since we could see three years of stock gains before that comes to pass.

Earnings May 8th.

After crashing to $3.30 on the secondary announcement shares have started to rebound. Wednesday's close was a two-month high. They announced the early closing for enrollment on two different cancer trials. They also announced a new therapy against respiratory tract tumors in a new study. Good things are breaking out all over.

Buy INO shares, currently $3.86, stop loss $3.55.
Optional: Buy May $4 call, currently 35 cents, no stop loss.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares are holding over prior resistance at $8.

Original Trade Description: March 30th.

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.

Position 4/1/19:
Long VIPS shares @ $8.19, see portfolio graphic for stop loss.
Optional: Long August $9 call @ 75 cents, see portfolio graphic for stop loss.



XON - Intrexon Corp - Company Profile

Comments:

No specific news. Shares fell back again but still holding over $5. We need a spark and a rebound that sticks.

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 but shares are holding and trying to rally. The real test of strength is coming.

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.

Update 4/3: Gamestop (GME) reported earnings of $1.60 that matched estimates but was down from $2.02 in the year ago quarter. Revenue declined from $3.32 billion to $3.06 billion and missed estimates for $3.28 billion. Even worse they projected a 5% to 10% decline in revenue in 2019 and losses of up to 5 cents per share in Q1. The company is struggling to adapt to changes in the video game industry.

Microsoft has announced a new Xbox game console that only uses downloaded games. That prevents users from reselling the games to Gamestop on CDs as in the past. Apple and Google also announced new video game offerings that stream games through your browser and the game does not reside on your computer or mobile device. That means no CDs and no consoles needed to play the games. That means no resale opportunities for Gamestop. This is also going to impact the resale value of existing games and consoles. In addition to their woes, Activision Blizzard announced today they were going to release a battle-royale version of Call of Duty that would be free online in the month of April.

Shares fell below $9 at the open but rebounded sharply in what should be a dead cat bounce.

Update 4/6/19: After the disappointing earnings Bank of America reiterated an underperform (sell) with a price target of $5. However, Telsey Advisory reiterated a market perform and a $10 target. The stock closed at $9.86.

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 break below 28 could get this ball rolling quickly downhill.

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.