Option Investor
Newsletter

Daily Newsletter, Saturday, 4/13/2019

Table of Contents

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

Market Wrap

Short Squeeze

by Jim Brown

Click here to email Jim Brown

Never short a dull market and especially when Dow components are in the headlines.

Weekly Statistics

Friday Statistics

When only five Dow components added 269 Dow points and that was the total gain for the day you could assume it was a short squeeze. Disney added 98 points on its streaming announcement. Boeing added 69 points after the CEO said they had flown 96 test flights of the 737 Max with the new software. JP Morgan added 36 points after strong earnings and Goldman added 36 points because of their earnings on Monday and the strong guidance from JPM. 3M added 28 points because strong Chinese economic numbers make a global recession less likely.

So how do you really know a rally is a short squeeze? When the Dow gaps open nearly 300 points and then trades sideways the rest of the day. A real rally moves steadily from the lower left of the chart to the upper right, not gap up vertically.

The other indexes followed the Dow higher but with a lot less enthusiasm. The Nasdaq was up only 4 points at 11:15 when the Dow was up +165. Tech stocks only reluctantly rebounded when the Dow went back to +250 intraday. The Russell failed to participate and barely avoided going negative intraday.




Consumer sentiment fell unexpectedly in April from 98.4 to 96.9. That is not a big drop, but it was the first in three months and with employment picking up again analysts expected it to continue rising. The present conditions component rose from 113.3 to 114.2 but the expectations component declined from 88.8 to 85.8.

Analysts blamed the tax cycle and consumers facing the challenge of paying their taxes for depressing sentiment. Weather could have also been a problem with some serious snowstorms crossing the nation. That affects income because people don't go to work and those that do are fighting the bad roads. Everything impacts sentiment. Seventy-five percent of respondents said it was a good time to make a major purchase, an increase of 1%, and 60% said it was a good time to buy a vehicle, down -2% and 66% said it was a good time to buy a house, -2%. Despite the decline it is still high on a relative basis. Sentiment is only down 1.9 points from this time last year.


Import prices rose 0.6% in March after a 0.6% rise in February. The rise in oil prices was the major culprit in the increase. Excluding petroleum, prices rose only 0.2%. If you exclude fuels, prices actually declined -0.2%. Crude oil prices rose 4.8% in March after a 13.7% rise in February. Imported natural gas prices rose 42.3% in March although they declined sharply in April. Export prices rose +0.7% also due to the rise in energy prices. We exported the most oil and gas ever in March. This report was ignored.

The positive economic reports for the week combined to lift the Atlanta Fed real-time GDPNow GDP forecast to 2.3% for Q1. This is a significant improvement from the 0.2% forecast back in early March.


Interest rates rocketed higher after the economic news from China and the EU extended the deadline for Brexit until October 31st. Those two headlines cleared a couple of big clouds from the market.

Overnight headlines from China showed a 14.2% rise in exports that blew past expectations for a 7.3% rise. However, imports declined -7.6% and far more than the -1.3% expectations. The March trade surplus came in at $32.64 billion and well over the $7.05 billion Reuters expected. The trade surplus with the U.S. rose from $14.72 billion to $20.5 billion. That brought the total for the quarter to $62.66 billion and a number I am sure the White House is impressing on trade negotiators.

The positive export number, Brexit extension and positive economic comments from JP Morgan CEO Jamie Dimon all combined to cause a sell off in treasuries and rise in yields. The yield on the 10-year rose to 2.56% and a four-week high.


The calendar for next week is busy with the most important reports the Philly Fed Survey and the Fed Beige Book. The retail sales, wholesale trade, etc, are important to the overall picture but they are not market movers. The Beige book is not normally a market mover, but it does fill in the economic blanks for each of the Fed regions. If there are any developing areas of weakness, they will show up here first.


Friday kicked off the Q1 earnings cycle with the first of the big banks. That cycle continues next week with Citigroup and Goldman Sachs on Monday. The tech sector gets into the swing with IBM and Netflix on Tuesday. The pace slows as we near the Good Friday holiday and the long weekend but accelerates the following week.

Of the 29 S&P companies that have reported, 79.3% have beaten estimates for earnings and 48.3% have beaten on revenue. The current earnings projection is for an earnings decline of -2.3% on a 4.9% increase in revenue. For Q1 there have been 85 guidance warnings and 31 guidance upgrades. The current forward PE is 16.9. Next week there are 50 S&P companies reporting.


The big market driver on Friday was Disney (DIS) and the streaming announcement. The Mouse House announced a $6.99 monthly service or $70 annually with access to 7,500 TV shows and more than 500 movies. They are targeting 60-90 million subscribers and expect to be profitable in fiscal 2024. They are going to invest $1 billion into original programming in 2020 and that will rise to $2 billion by 2024. That pales compared to the $15 billion Netflix is expected to spend in 2019. What Disney has working for it is their studio movies that are released to theaters. That budget is not a part of the streaming project. That means they have Marvel, Pixar, Lucas Films, etc, all making feature length films for the box office that will eventually make their way to the streaming system for no net cost to Disney+. The cost will have already been covered by the revenue from the box office.

For instance, Avengers: Endgame, is expected to do $1 billion in its opening weekend and that will be a record for any film. There have been 21 movies in the Marvel universe, but you do not have to watch them all to enjoy Endgame to its fullest. This is expected to be the last film in the series. According to the ComicBook.com the movies you need to watch in this order to understand the relationships in Endgame are:

IronMan
Avengers
Captain America: Winter Soldier
Avengers: Age of Ultron
Captain America: Civil War
Avengers: Infinity War
Avengers: Endgame

The Marvel characters are just one segment of the highly profitable Disney enterprise. Star Wars would be another. These are going to be a staple of the Disney+ streaming portfolio but how many times can you watch these movies before you glaze over? Disney has 70 years of content available to stream but I Love Lucy and Gomer Pyle reruns are not going to be high on the list. As a viewing public we have become spoiled to the high dollar, high graphics, high dollar talent productions that we have today.

This is where Netflix can compete. Their $15 billion a year in original content is going to be producing 120-140 shows a year and Disney is producing a dozen.

Analysts and investors alike were impressed by the Disney+ announcement. They do believe families will add another subscription to their list and very few analysts think they will cancel Netflix or Amazon Prime. This is the cost of entertainment for the future and if you have been to the movies lately you realize how cheap this package will be. You can't go on a date to the movies for much less than $50 and taking your wife and kids to the movies is cost prohibitive. This is going to seriously damage brick and mortar movies over the long term. With 7 streaming services battling it out for control of your TV the prices are going to remain low.

The streamers can afford to keep prices low because only a couple million viewers will go see a movie in theaters but tens of millions will stream it and those streaming fees are monthly, every month.

Disney also owns Hulu and they expect to reach 40-60 million subscribers there as well by 2024. They currently have 25 million subscribers. Add in ESPN+ and Disney is going to appeal to almost every type of viewer.

Netflix has 139 million subscribers and is expected to double over the next five years. There will be a streaming war as Disney, AT&T Warner Media, Verizon, Apple, Amazon Prime, Hulu and others all compete for the same eyeballs. Fortunately, none of them are exclusive and you can have as many subscriptions as you can afford.

Disney shares spiked $13.50 (11.5%) to an all time high at $130 on six times average volume. This added 98 Dow points and helped to power the short squeeze. Netflix (NFLX) shares declined -$16 (-4%) to $351 on the news. Netflix reports earnings on Tuesday.



JP Morgan (JPM) reported earnings on Friday of $2.37 that beat estimates for $2.35. Revenue of $29.85 billion was a new record and easily beat estimates for $28.44 billion. Net interest income rose 8% to $14.6 billion and also beat estimates for $14.4 billion. The retail loan portfolio rose by 4% and deposits rose 3%. Credit card sales volume rose 10%. There was a 12% spike in advisory revenue and 21% rise in debt underwriting. Investment banking revenue rose 44%. Everything was not rosy. Fixed income revenue fell -8% and equity market revenue fell 13%. Shares spiked $5 after CEO Jamie Dimon said, "Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong." He also said he did not expect a recession in 2019, 2020 or 2021. They bought back $4.7 billion in stock.


Wells Fargo (WFC) shares went the opposite direction after reporting adjusted earnings of $1.03 that missed estimates for $1.09. Revenue declined to $21.6 billion but beat estimates for $20.9 billion. Net interest income was nearly flat at 12.3 billion, up only slightly from $12.2 billion. Non-interest income declined from $9.696 billion to $9.298 billion. Wells is a big mortgage lender and mortgage banking income rose from $467 million to $708 million.

The challenge came from weak guidance. The CFO said net interest income would decline 2-5% in 2019 compared to prior forecasts for a 2% rise to 2% decline. For Q1 net interest income was down -3% from the prior quarter. They also cancelled their expense targets for 2020 after the departure of the CEO. The bank raised its loan loss provision from $654 million to $845 million based on less favorable economic conditions.


PNC Financial (PNC) reported earnings of $2.61 that beat estimates for $2.59. That was a 7.4% increase from the year ago quarter. Revenues of $4.29 billion beat estimates for $4.24 billion. Net interest income rose 5% to $2.48 billion. Non-interest income rose 3% to $1.81 billion. Loans rose 3% to $232.3 billion and deposits rose 1% to $271.2 billion. However, income from corporate and institutional banking declined 11% and asset management income declined 17%. Shares rallied $4 on the earnings beat.


Uber finally filed to for a $10 billion IPO that could value the company at $120 billion. They have raised $24 billion in private capital. Unlike Lyft, Uber is an integrated company that functions in 700 cities in dozens of countries. In addition to 12 different types of rides you can order from the App, they have Uber Eats where you can order food from more than 220,000 restaurants in more than 500 cities and have it delivered to your door. More than 15 million people ordered meals in Q4. There is also Uber freight, which had revenue of $125 million in Q4. They have ride share bikes and ride share scooters. They are currently buying competitors in multiple countries. They had 22,263 full time employees at the end of 2018 with 11,488 outside the USA. They have 3.9 million drivers on the platform serving 91 million "monthly active platform customers."

In 2018 it generated $11.4 billion in revenue and lost $1.8 billion. In the S1 they say Uber may never reach profitability and that should be a red flag. They are using the Amazon model of if you build it, they will come. In doing so they are trying to branch out into every conceivable mode of transportation including developing their own self driving operating system. They are the Amazon of the transportation sector. While Uber is vastly larger and more complex than Lyft, they must eventually make a profit to stay in business. They are hoping one of their offshoot efforts will become viable and lift them out of the loss column.

Meanwhile LYFT shares continue to move lower. Once UBER prices and opens for trading, I expect LYFT shares to trade under $50 on their way to significantly lower levels.

Hedgeye: Are unicorns worth buying?


Apple (AAPL) is suffering from iPhone fatigue. For the second time in a week an analyst has cut their rating to "sell." New Street Research said demand trends are fading and the consensus view of earnings is too optimistic for Q2. He based this analysis on the sales trends from 2016 when sales hit an air pocket following the iPhone 6S launch. He is expecting sales to increase in Q4 when the new models are announced.

He said the services revenue forecast is too aggressive because it requires new iPhone users to sell new services. Existing users already have the services they want and there is very little services growth in the installed user base. He is also less than optimistic about the recent announcement for new subscription services. Apple was vague on details and costs and until the services are actually launched, he is not applying much value. Apple TV is an example since it was launched long ago and never contributed meaningfully.

HSBC also cut shares from hold to sell. China's smartphone shipments declined 6% in Q1 and the number of new handsets activated in March declined 35%. Q4 was the fifth consecutive decline in global smartphone shipments with a year over year decline of 7%. The survey showed demand for premium phones with high prices declined significantly. In Q4 IDC said iPhone sales in China fell 20%. Google is set to roll out the new models of the Pixel phone in May and Samsung will debut new models later in the summer ahead of the iPhone announcement.


GE agreed to pay a $1.5 billion fine over problems with sub-prime mortgages in its WMC Mortgage unit prior to 2008. The fine is due to the unit concealing the poor credit quality of the loans and for lax fraud controls when packaging the loans into securities sold to investors. WMC was acquired by GE Capital Corp in 2004 and originated more than $65 billion in loans over the next three years. GE sold WMC in 2007. The Dept of the Treasury ranked WMC as the fourth "worst subprime originator." Earlier in the week JP Morgan cut GE from neutral to sell with a price target of $5.


How is that Medicare for all working out for you? If you are a shareholder in the health care sector it has been painful. UnitedHealth (UNH) has declined almost $30 over the last three days since the democratic hopefuls have adopted that as one of their main platform issues. For people bad at math the Bernie Sanders plan would cost about $3.3 trillion and eliminate private health insurance as we know it. It has no chance of passing even if he was elected simply because of the cost. While young people like the sound of FREE healthcare, they would not like the 35% tax hike it would take to provide that free care. This is a major buying opportunity for these companies.


Anadarko Petroleum (APC) announced it had agreed to be acquired by Chevron (CVX) for $33 billion in cash and stock. They will also assume about $5 billion in Anadarko debt. This will create the second largest publicly traded energy company. Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each APC share they own. The deal is slated to close in the second half of 2019. Chevron also said it would increase their current stock buyback program from $4 billion to $5 billion. Chevron said the deal would produce about $2 billion in annual synergies and be accretive to free cash flow after one year. Chevron shares declined $6 on the announcement to erase about 42 Dow points.

I personally think it is a great deal. I have always liked Anadarko and Chevron as my two favorite energy companies. Chevron and Anadarko are both large landholders in the Permian with many adjoining leases. This will give Chevron an almost continuous 75 mile wide property position in the best areas of the Permian. Chevron has 2.2 million acres in the Permian and Anadarko has more than 589,000 acres. Anadarko also has world class deepwater properties in the Gulf of Mexico and a monster gas/LNG development in Mozambique.

Permian Map: Yellow is Anadarko, Blue is Chevron

Occidental Petroleum (OXY) had bid MORE than $70 per share in cash and stock and had more cash than the Chevron bid. However, OXY is not as powerful as Chevron on the world stage and they would have required a shareholder vote for approval. Reportedly, there were also some structural issues with the OXY bid. According to reports, OXY is considering its options for a higher bid. The Chevron/Anadarko breakup fee is 3% or roughly $1 billion.



The combination of these two companies could start another land rush in the Permian. Companies that have developed significant acreage positions and could be acquisition targets include Apache (APA), Pioneer Natural Resources (PXD) and EOG Resources (EOG). Concho (CXO) and Noble Energy (NBL) were also mentioned but their positions are significantly smaller. If another major like Exxon, BP, Shell or Total decide to ramp up in the Permian they are likely to go for the big companies where they can actually benefit from the increased scale rather than a smaller company that would not provide the big increase in reserves.

Exxon bought XTO back at the height of the oil boom a decade ago just before prices crashed over the next ten years. Exxon had a case of severe indigestion since XTO was primarily natural gas and one of the largest producers in North America. Gas prices collapsed from $12 to less than $2. Exxon has evolved XTO and they are now the most active operator in the Permian, according to XTO and Exxon with more than 50 active rigs. Exxon is planning to increase their output in the Permian by 80% to more than one million Bpd by 2024. They are building 30 oil and gas processing centers in the Permian to handle their future production. Exxon has the most to gain by increasing its 1.6 million acre position and consolidating by filling in the lease gaps with a large acquisition. They have been actively buying 20,000-30,000 acre leases in recent months. EOG has more than 850,000 Permian acres. Pioneer has more than 750,000 acres. Don't forget Occidental is still an active acquirer at this time.



Crude prices have plateaued at $65 despite conflict in Libya and economic collapse in Venezuela. The Russian comments about ending their production cuts in June has the market worried. Since oil prices normally peak around Memorial Day, I still expect them to rise from here. Inventories rose the last three weeks because refiners are still in their maintenance period and they are still trying to deplete supplies of winter blend fuels ahead of summer fuel production. This inventory build is going to reverse into declines very soon as refinery utilization increases over 90% into the spring driving season.

We only added two oil rigs last week after the 19 rig spike the prior week. Gas rigs declined by five. There is still a lack of transport capacity for Permian crude so wells drilled now will go into the massive backlog of uncompleted wells. There were 8,576 drilled and uncompleted wells at the end of February and rising.






Markets

With the S&P only 23 points from a new high, I would really be surprised if we did not reach it. As I have said all along, the prior highs act like a tractor beam in a bullish market. The Dow is still 416 points below its prior high at 26,828 but that is just one good week with a couple Dow components posting large gains each day. The Nasdaq is about 125 points from a new high. All of these indexes could easily see those levels reached this week if we have some positive earnings guidance.

On the headline front, the comments from the White House suggest all the hard points have been agreed on the China trade talks and they are just finishing up on the punctuation and presentation. Once President Xi approves the final draft, they will schedule a Florida summit and that announcement will be the equivalent of a done deal. Whether that has any upward lift left is unknown. We have been trading on expectations of a deal for so long, there is a serious risk of a sell the news event. It might not be on the day it is announced or concluded but shortly thereafter because that goal will no longer be present.

The earnings are the wild card. If they continue to be positive and the forecast creeps back into positive territory and guidance is decent, we could actually see some further market gains. However, after rising 20% in 2019, the decline into the summer doldrums could be especially frustrating. We all would like to see the market skip the normal summer slowdown and I would also like to find a winning Powerball ticket in my mailbox. It is possible we will not see a market pause over the summer but highly unlikely.

Because it is unlikely there will be a lot of investors betting on that to happen. A funny thing happens when the herd moves in the same direction. The market has a tendency to move in the opposite direction. Time will tell what summer will bring and there is nothing we can do but watch and wait.

There is no resistance between Friday's close and the prior highs. The only thing holding us back is a reluctance to buy a market top.


The Dow closed at 26,412 on Friday and 12 points below the close on April 5th. Normally that would be resistance, but I doubt it will be this week. The market is too close to the prior high at 26,828. However, the January high at 26,616 could be light resistance. That would be the head and shoulders level in a perfect chart, but I doubt that will occur this close to the high. I could foresee a double top, so we need to watch for that in the days ahead.



The Nasdaq is easing slowly higher and now only 125 points from a new high. There is no visible resistance in the way but there is congestion from September. It may not be a straight shot unless Netflix posts blowout numbers on Tuesday. Facebook is now leading the FANG pack with a 7-month high close on Friday while Amazon has stalled at $1,850.



The Russell remains the laggard, but it is slowly easing up to that magic number resistance at 1,600. If positive earnings were to suddenly lift the Russell over that level a breakout could be powerful.


I believe we will see new highs in the coming days. Positive earnings guidance will be the key. Moving materially over the prior highs could be a significant challenge but one I would like to see. It is hard not to be bullish at new highs but as we saw from the three lowest volume days of the year last week, there are a lot of investors waiting patiently on the sidelines rather than chasing prices higher. Be patient. There is always another day to trade.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The way to get started is to quit talking and begin doing."

Walt Disney


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


New Plays

Business Slowly Dying

by Jim Brown

Click here to email Jim Brown
Editor's Note

The metrics are bad and getting worse. Nearly every metric at the Signet stores is declining.

 

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


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

SIG - Signet Jewelers - Company Description

Signet Jewelers Limited engages in the retail sale of diamond jewelry, watches, and other products. As of February 02, 2019, it operated 3,334 stores and kiosks. The company operates through three segments, North America, International, and Other. The North America segment operates stores in malls and off-mall locations primarily under the Kay Jewelers, Kay Jewelers Outlet, Jared The Galleria Of Jewelry, Jared Vault, Zales Jewelers, Zales Outlet, Piercing Pagoda, Peoples Jewellers, Gordon's Jewelers, and Mappins Jewellers regional banners; and JamesAllen.com, an online jewelry retailer Website. This segment operated 2,729 locations in the United States and 128 locations in Canada. The International segment operates stores in shopping malls and off-mall locations, principally under the H.Samuel and Ernest Jones brands. This segment operated 477 stores in the United Kingdom, the Republic of Ireland, and the Channel Islands. The Other segment is involved in the purchase and conversion of rough diamonds to polished stones, as well as provision of diamond polishing services. Signet Jewelers Limited was founded in 1950 and is based in Hamilton, Bermuda. Company description from FinViz.com.

On April 4th, Signet Jewelers reported earnings of $3.96 that beat estimates for $3.77 but that was still a decline of 7.5% from the year ago quarter. Revenue of $2.154.7 billion beat the estimates for $2.142 billion but declined 6% year over year.

Globally same store sales declined -2% with sales in North America down -5.5%. The average number of transactions declined 4%. Sales at Zales stores declined -2% and Piercing Pagoda sales declined -17.1%. Kay stores fell -1.6%, Jared -8.4% and James Allen -1.4%. international sales declined -16.6% to $195 million and same store sales fell -7.3%. Average transaction values declined -5.4% and the number of transactions declined -2.3%.

They guided for Q2 for a loss of 17-28 cents and analysts were expecting a loss of 6 cents. Same store sales are expected to decline between 0.5% and 1.5%. For the full year they guided for earnings of $2.87-$3.45 and analysts were expecting $3.53. Same store sales are expected to be down -2.5% for the year. They closed 262 stores in 2018 and plan to close another 150 in 2019.

There was NOTHING to like about these earnings. Shares have fallen $5 since April 4th and with metrics like those they could fall significantly lower. Shares closed at a new 52-week low on Friday.

Sell short SIG shares, currently $23.19, stop loss $24.15.
Optional: Buy July $20 put, currently $1.50, stop loss $25.65.



Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.



In Play Updates and Reviews

Still Lagging

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small caps posted only a minor gain despite the 269-point Dow rally. This was a big cap short squeeze thanks to Disney, JP Morgan, Goldman Sachs and Boeing. They added 250 Dow points of the 269-point gain. The small cap A/D line was almost 2:1 in favor of advancers but the individual stock gains were minimal. However, with the S&P only 23 points from a new high the market path is likely to be higher at least in the short term. Eventually there will be some price chasing on the small caps and hopefully that will not trigger the climax top.



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


XON - Intrexon Corp
The long position was stopped at $4.85.



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. New 7-month closing 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:

No specific news. Shares closed at a 2-month high.

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.



PSTG - Pure Storage - Company Profile

Comments:

No specific news. Resistance holding.

Original Trade Description: April 5th.

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.

Position 4/11/19:
Long PSTG shares @ $23.40, see portfolio graphic for stop loss.
Optional: Long May $25 call @ 40 cents, see portfolio graphic for 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 below support at $5 to stop us out. The biotech sector has been very weak over the last several days.

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:
Closed 4/12: Long XON shares @ $5.61, exit $4.85, -.76 loss.
Optional:
Closed 4/12: Long July $6 call @ $.95, exit .75, -20 cent loss.



BEARISH Play Updates

GME - Gamestop - Company Description

Comments:

No specific news but shares finally broke down as we expected. Next stop $7.

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 big break below 28 and a new 6-month low.

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.