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Daily Newsletter, Saturday, 5/11/2019

Table of Contents

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

Market Wrap

Trade Disaster

by Jim Brown

Click here to email Jim Brown

The worst of all potential trade outcomes crashed the market last week.

Weekly Statistics

Friday Statistics

If it was not for the 530-point rebound in the Dow on Friday, it would have been a lot worse. The rebound began after Secretary Mnuchin said the Thr/Fri trade talks had been constructive and talks would continue. President Trump echoed those comments in a tweet to keep the rebound moving.

Unfortunately, the tariffs rose on Friday and the president will release his plans for the next round of tariffs on Monday. China's vice premier said late Friday evening that three things needed to occur to resolve the trade dispute. All tariffs would need to be cancelled, realistic targets set for China's purchase of US goods and the text of the deal must be "balanced" to ensure the "dignity" of both nations. US negotiators then told China's team they have one month to complete negotiations or face tariffs on ALL products exported to the USA. The US has demanded that China change its laws regarding intellectual property and company ownership and China is refusing saying they will only issue a state council directive instead and would not change laws.

With President Trump continually blasting China for its "illegal" actions it is going to be difficult to produce a deal that is balanced and ensures dignity and dropping the tariffs before there is evidence of deal compliance is not likely to happen.

As of Saturday, I had not heard of any retaliation moves by China, but they are expected. Mnuchin said there are no further talks scheduled.

Saturday morning President Trump warned China to act now on trade or risk facing a worse deal if negotiations continue into his second term. Trump claimed China was hoping to wait for a democrat to be elected to revive the negotiations.

In addition to the tariffs, US warships sailed within 12 miles of China's disputed islands in the South China Sea sparking a complaint from China.

The FCC voted 5 to 0 to deny China Mobil (CHL) a right to operate in the USA. If they had allowed them to operate in the US they would have access to US telephone lines, fiber-optic cables, cellular networks and communications satellites. China has been trying to win approval since 2011. The FCC said allowing China inside our networks would be a security risk. The FCC also warned it was considering revoking licenses for other Chinese carriers that had previously been allowed licenses. The FCC said China Telecom has been hijacking US traffic and redirecting it through China. There is an FCC order pending to require companies to eliminate communications equipment from Huawei and ZTE that is currently in use based on security concerns.

The president is taking the war to China on multiple fronts other than simply trade. This is going to stiffen their resolve not to agree to a strict trade policy. This will also draw out any future negotiations. With a one-month deadline there will be further flare ups and headlines to roil the market.



Friday's economics were market positive, but investors were not paying attention. The Consumer Price Index for April rose +0.3% and less than the 0.4% analysts expected. Energy prices rose but food prices fell for the first time since January 2017. Core inflation, excluding food and energy rose only 0.1%. Energy rose 2.9% for the month. On a year over year basis the index was up 2.0%.

Food prices fell -0.1% but food at home prices declined -0.5%. The CPI for rent increased 0.4%, lodging away from home +1.6% but apparel declined -0.8% after a -1.9% decline in March. Medical care rose 0.9% overall but medical services rose only 0.2%. Household furnishings declined -0.3% and the first decline in a year.

With inflation tame there is no rush for the Fed to hike rates and it would take a significant decline in the CPI for the Fed to cut rates.

We have an active economic calendar for next week, but the only material report is the Philly Fed Manufacturing Survey on Thursday. None of the reports this week should be market movers if the numbers are near the analysts' expectations.


The earnings calendar was cut in half this week but there are still some big names. Cisco, Nvidia and Walmart are the big dogs.

Of the 448 S&P companies that have reported Q1 earnings, 75.4% have beaten expectations. The current earnings forecast of 1.3% growth is significantly better than the -1.8% decline forecast from just a couple weeks ago. 56.9% of companies have beaten on revenue with the Q1 forecast now 5.6% growth.

For Q2 there have been 48 companies with negative guidance with 19 companies issuing positive guidance. Only 9 S&P companies report earnings this week. The Q2 forecast is now for 1.2% growth and 1.8% for Q3. Those numbers are very anemic.


Apple shares had a bad week on worries that China could retaliate against the US by penalizing Apple with tariffs. That could be a double-edged sword since slowing Apple's exports from China would hurt the manufacturing centers in China. Shares fell from the $215 high on the 1st to $192.77 intraday on Friday. That equates to about $75 billion in market cap. Apple is at risk for about $160 in added costs per phone if the full set of tariffs are enacted. Apple could try to absorb that cost or pass it on to consumers.

Apple has a lot of problems and they are trying to convince us they are not a phone company. Unfortunately, 80% of their revenue comes from iPhones and their market share continues to decline. This declining revenue and market share suggest Apple would eat any added tariffs instead of passing those costs in the form of higher prices. That would reduce Apple's earnings by about $3 in 2020.

On the positive side, chip supplier Dialog Semiconductor said China's smartphone market is rapidly recovering. While it was very soft in Q1, it accelerated in late March and April. Q1 shipments overall fell -3% and the lowest level since 2013. Apple's shipments in China declined 30% in Q1 while Huawei saw a 41% surge in smartphone shipments. Xiaomi also showed a surge in sales. Unfortunately for Apple this surge in homegrown brands means further market share loss. Chinese manufacturers are selling $300 phones and Apple is selling $900 phones.

Bespoke Investment's Paul Hickey said it is tough to be bearish on Apple given the decline and the PE of 16 that is 25% less than the technology sector as a whole. If you subtract their cash, planned $75 billion buyback and accelerated dividend, they are a significant bargain today.


Shares of Boeing (BA) fell $30 over the last week on worries of Chinese retaliation and continued headlines about the 737-MAX problems. Victim compensation for the two crashes is expected to be well over $1 billion. Part of that determination will be made by calculating the amount of time passengers knew they were crashing. If they knew they were about to die for 15 minutes the compensation is more than if they only had 3 minutes of warning. The Ethiopian flight crashed 6 minutes after takeoff and the Lion Air crash was 11 minutes into the flight. Those are relatively short periods. It was not as though there was a catastrophic engine failure at 37,000 feet and it took 30 min before the plane glided nose first into a grassy field and exploded. Families in Indonesia have already been approached by Lion Air with 1 billion rupiah offers ($90,000). That is 26 times the annual average income. Forty Lion air cases have been filed in Chicago where Boeing is headquartered. Boeing must settle in advance because a jury trial and award in Chicago could be tens of billions although it would be appealed lower and take years to settle.

If Boeing knew about the potential danger in the autopilot system and failed to warn the airlines, the damages could be significantly more. Boeing has insurance but the deductible would be huge.

Since the 737 accounts for a third of Boeing's profits, there is going to be a challenge over order cancellations and failures to receive new orders because of the stigma over the 737-MAX model. With thousands of 737s in use this is not the same as the Ford Pinto. The model will be rehabilitated once it is flying again. They will probably drop the MAX label and just call it the 737-8 which is the official designation. On May 23rd a global summit of regulators will lay out a path for certifying the proposed software and hardware fixes and arrive at a target date for removing the grounding and letting the planes back into the air. Some airlines are now advertising new routes with the 737-MAX starting in September so clearly, they expect them to be flying again soon. American pilots claim there is no material problem with the equipment, and it was a pilot training error in both cases. In one case an experienced pilot was flying as a passenger in the cockpit and the plane began to exhibit the crash symptoms. He quickly told the crew how to recover and the flight continued. That plane crashed the next day with a co-pilot with only 300 hours of training.

Boeing was also weak on worries over potential Chinese retaliation. Retaliation against Boeing would only cause more wrath from President Trump, so China may not proceed in that direction. The $370 level had been support for several weeks until the China headlines exploded.


3M (MMM) is one company that is actually being hurt by the tariffs on China. However, it is not because of higher import prices in the US. 3M said a sharp decline in automotive and electronics sectors in China caused it to cut production and lay off 2,000 workers. Sales in Asia Pacific which includes China fell -7.4% and Europe, Middle East and Africa (EMEA) fell 9.4%. Not only is the weakness in the Chinese economy impacting all of Asia but the tariffs are having a meaningful impact in China. 3M cut full year estimates from $10.45-$10.90 to $9.25-$9.75. Shares have imploded since the earnings and accelerated last week on the trade disaster. Shares have declined $45 dollars in two weeks and erased more than 300 points from the Dow.


Intel (INTC) single handedly cratered the tech sector last week when they warned to expect only single digit growth in earnings and revenues over the next three years. They said PC chip growth would be flat, but datacenter chips could grow by double digits. Intel once controlled 90% market share in computer processors but they said share had declined to only 28%. Intel suffered several missteps in developing its 10-nanometer technology and will only be able to launch to PC chips late in 2019 and servers in early 2020. Their 7 nm chips are not expected to be out until late 2021. AMD is already producing 10 nm chips and has been for a while and their 7 nm chips will be out later this year. AMD will release multiple models of processors built on 7 nm in Q3. Intel has lost its lead and AMD is surging ahead after being written off as dead for the last decade.

Intel's new CEO Bob Swan warned that the race to catch up to AMD would depress gross margins through 2021 where they should bottom. This is not an encouraging outlook for Intel and the China worries are just one more headwind for the chip giant. The problems of a tech slowdown in China is depressing prices on memory chips leading to a glut of inventory for Intel.


Disney (DIS) reported earnings of $1.84 that easily beat estimates for $1.58 and that was before the $2 billion box office of Avengers Endgame in April. Revenue was $14.92 billion that beat estimates for $14.5 billion. Disney said the record-breaking Avengers Endgame movie would stream exclusively on Disney+ starting on December 11th. Disney reported movie-studio revenue of $2.13 billion, television revenue of $5.52 billion and theme park revenue of $6.17 billion. Earnings will change significantly in Q2 now that they completed the $71 billion acquisition of Fox Corp assets. They sold $10 billion in sports networks to Sinclair Broadcasting to avoid anti-trust concerns. The revamped Disney will be shown in their Q2 earnings. Shares have fallen from their post streaming peak but are holding in the $134 range.


Lyft (LYFT) reported an adjusted loss of $9.02 per share. That is a small improvement from the loss of $11.40 in the year ago quarter, but it is a huge amount of money. Revenue was $776 million compared to the loss of $1.138 billion. They guided for revenue of $800-$810 million for Q2 and $3.275-$3.3 billion for the full year. Active users rose to 20.5 million, up from 14 million. Average revenue per rider rose from $28.27 to $37.86.

The big question now that Lyft is public is how long can it continue to lose $1 billion per quarter with total revenue at $800 million? With Uber and Lyft both losing tons of cash, cheap rides are going to end. If ride prices double to an average of $75 as needed to breakeven, riders will disappear.


The Lyft earnings crashed the Uber IPO. Investors doing the math on Lyft were reluctant to go big on Uber and the IPO was a bust. Uber priced its shares at $45 and closed at $41.55 for a 7.6% decline. It only traded at the IPO price on the opening spike. Thank you Paypal for buying $500 million at $45 at the open. Uber has a much larger business than Lyft but continues to lose more than $1 billion per quarter. Their IPO documents said Uber may never be profitable. That is the biggest problem for both companies. While the ride hailing business has been novel and much appreciated, if they don't make a profit, they will not succeed.

Both Lyft and Uber have been supported over the last several years by venture capitalists with deep pockets. The dream of a big IPO and global domination has fueled their rise but that may end up being a nightmare rather than a dream. Now as public companies they cannot return to those deep pockets for more cash. Reality has arrived and it is ugly.

As public companies they will have to produce profits or at least show a pattern of reduced losses to keep investors engaged. Uber is being sued by its drivers for benefits and higher wages. Uber said driver dissatisfaction is likely to increase as they REDUCE driver incentives to try and reduce losses. Trying to become profitable by reducing $1 billion in costs per quarter is going to be a challenge when driver compensation is their biggest expense. A recent study found that Uber drivers are paid less than 90% of Americans on an hourly basis and they have no benefits like health insurance. EquityZen does not expect Uber to become profitable until 2023 and only then because of Uber Freight and self-driving cars, neither of which currently exist.

Uber's $70 billion in market cap is likely to erode quickly as those venture capitalists see the writing on the wall and see the IPO as an opportunity to exit a bad investment. Uber issued 180 million shares in the IPO. More than 186 million traded on Friday.


Symantec (SYMC) reported earnings of 39 cents that missed estimates for 44 cents. Revenue of $1.19 billion missed estimates for $1.21 billion. CEO Greg Clark abruptly resigned. Board member Richard Hill took over the position on a temporary basis. Clark had been CEO since 2016. The new CEO blamed a miss on the enterprise offerings which produced revenue below the prior guidance. The company guided for full year revenue of $4.75-$4.89 billion and analysts were expecting $4.97 billion. Shares fell 12% on the news.


IBM registered to sell $20 billion in debt to finance its $34 billion acquisition of Red Hat (RHT). US regulators have given their approval for the deal, but overseas regulators are still deciding. IBM expects the deal to close in the second half of 2019. The EU Commission is the current hurdle. Just because the US approved it does not mean the EU will rubber stamp it. Given the bad blood between the US and EU recently they could delay it just to be troublemakers or find some privacy reason to deny it. While it is unusual for the US to clear a transaction and overseas regulators to deny it, this does happen. China denied the Qualcomm acquisition of NXP Semiconductors and cost Qualcomm a $2 billion breakup fee. China did this as a poke in the eye to the US and the trade demands.


Oil prices were dormant for the week at $62 despite increased tensions over Iran and continued declines in Venezuela. Inventories declined slightly but refinery utilization also declined which is highly unusual for this time of year. We should be seeing utilization well over 90%. There have been some unplanned outages and that appears to be impacting the metrics. Refiners should be in full production of summer blend fuels and refined products should be rising steadily.

Active rigs declined by 2, which is minimal and should have no impact on production. It was the decline of -31 a couple weeks ago that was dramatic. As long as oil prices continue to hold at this level there is no reason for a surge in active rigs. The number of drilled but uncompleted wells at 8,500 is the reason active rigs are declining. We will get the April report next week and see if the numbers of uncompleted wells rose.






Markets

It was an ugly week and the rebound on Friday may have just been short covering. The tariff announcement by the president last Sunday night sent the futures on a wild ride lower. That was the start of a major decline in equities but end result was only a 2.2% decline in the S&P and 3.0% decline in the Nasdaq. Had we closed at the Friday lows those numbers would have been nearly 2% higher.

The outlook for the market is negative. While the Friday rebound was blamed on the Mnuchin and Trump comments "negotiations were constructive" anyone with a brain can see there is trouble ahead. The negotiations have stalled with "no further meetings are scheduled" and both countries are firming up their verbal defensives to try and claim the high ground.

Regardless of what China says, they need us more than we need them. They have a billion workers they need to keep working and they require the export income to fund their government spending. Most of the large companies have government ownership positions so a portion of the profits goes to the government. China has implemented 72 stimulus actions to date in 2019. They are working hard to keep the economy moving but they need exports. They can produce all the products they want but much of that goes to the USA.

The resumption of hostilities by President Trump put President Xi in a bad position. As the vice premier said on Friday, the agreement must be structured in such a way to provide each country with dignity. Xi cannot be seen as caving into President Trump's demands. He would lose face in China and that cannot be allowed. This means Xi must stiffen his resolve and maintain a strong front to his people.

Because it is a communist country, Twitter is not allowed. Chinese citizens do not know why their market cratered last week. The news was not allowed to mention trade negotiations. Screenshots of Twitter posts were scrubbed from the internet to prevent them from being received by email or text and forwarded to others. Videos and news items from the US were blocked. Every way the information could come into China was monitored and censured.

That is actually positive for the negotiations since the citizens do not realize there is a big trade fight in progress. Some may know and some may be passing it along, but the vast majority of the 1.3 billion citizens are clueless.

We are likely going to be inundated with trade headlines for the next month and they will increase as China's time runs out. The president will continue ratcheting up his demands and threats and that will roil the market.

We are now in the "sell in May and go away, come back again on Labor Day" period. The first ten days of May have been ugly and with 1% earnings growth in Q1, Q2 and Q3, there is little to entice investors back into the market. They call it the summer doldrums because many investors take the summer off. They do not want to be worried about their positions while they are hiking the mountains, swimming at the beach, on a cruise to the Caribbean or a road trip with the family. Starting the summer off with a 5% decline is a way to push these retail investors back into cash for the summer.

The S&P has traded below the 50-day at 2,861 for two consecutive days but closed back above that level. In theory that support has held. The 2,872 support that held in early April is also back in play. Resistance is back at 2,900 and the new closing high is 2,945 or 64 points above Friday's close. I would be very surprised if we saw that level again next week. We have a better chance for a decline than a rally.


The Dow continues to be hammered by large declines in a handful of stocks. 3M, Boeing, Caterpillar, etc, have erased more than 1,000 points from the Dow in recent weeks. The index is trading back below 26,000 after coming to a dead stop at the 26,616 resistance for two weeks. The lack of Dow components reporting earnings this week could be a plus. Walmart is the only reporter. A lack of multiple reporters means a lack of stocks losing a lot of points. The rest of the index should be calm with the exception of the tariff sensitive stocks.



The Nasdaq was down sharply intraday to 7,759 but rebounded nearly 60 points to close at 7,917 and well over the 50-day average. This was the second day the average was penetrated but the index rebound to close over that level. This is positive and hopefully it holds. The big cap tech stocks were evenly mixed on Friday with the exception of the $94 gain in Booking Holdings, formerly Priceline.com. They missed on earnings but rose anyway.



The Russell 2000 did not lose more than the big cap indexes with only a -2.5% decline. That put us back to the correction level support at 1,566 and the combination of the 50/200 day averages provided additional support. This is somewhat encouraging that small caps did not implode but that is because they are less impacted by events in China. Most are domestically focused companies and immune from a lot of the global trade battle. It also suggests fund managers are not yet ready to pull the plug on the market.


I am worried about the market in the weeks ahead. The indexes were struggling to try and make new highs when it was thought there would be a trade deal at any time. Without that carrot hanging over the market there is nothing to keep traders interested through the summer doldrums. Memorial Day is only two weeks away and that is the kickoff of the summer vacation season. Schools are already closing for the summer and that means more demands on parent's time and attention. There is nothing to prevent the market from posting gains but there is nothing to entice those gains. Earnings at 1% and a full-blown trade war should not produce positive headlines.

Enter passively and exit aggressively!

Jim Brown

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"Never give up, for that is just the place and time that the tide will turn."

Harriet Beecher Stowe


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New Plays

Tariff Danger

by Jim Brown

Click here to email Jim Brown
Editor's Note

The new round of tariffs will be painful for some companies. Bitauto Holdings is one of those companies.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

BITA - BitAuto Holdings - Company Description

Bitauto Holdings Limited, through its subsidiaries, provides Internet content and marketing services, and transaction services for the automobile industry in the People's Republic of China. It operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment offers advertising services, including automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com Website and related mobile applications. It also provides transaction-focused online advertisement and promotional services for automakers, automobile dealers, auto finance partners, and insurance companies; and Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates an online automobile retail transaction platform, which provides transaction platform and self-operated financing services. The Digital Marketing Solutions Business segment offers one-stop digital marketing solutions, including Website creation and maintenance, online public relation, online marketing campaign, advertising agency, big data application, and digital image creation services for automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

In theory this would be a great play on the long side because the stock is only trading at half its book value. However, auto sales in China are crashing. The company supplies online subscription and marketing services to auto dealers. When car sales are falling those dealers do not have the money to spend on online marketing programs.

The company has been spending a huge amount of money in developing systems and new programs to capitalize on a future rebound in sales but it has not arrived and their cash burn is accelerating.

In the next round of sanctions scheduled to be announced next week there could be a large hit to autos and auto parts. This will raise the price of cars and slow sales even more. Bitauto shares have been crashing since early March and the new tariffs could cause that to accelerate.

Earnings June 18th.

Sell short BITA shares, currently $11.28, stop loss $12.75.
Optional: Buy July $10 Put, currently 70 cents. No stop loss

More than 500 of these were bought on Friday.




In Play Updates and Reviews

Breakdown

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell went from a promising breakout to a frustrating break down in only four days. The small cap index broke over strong resistance at 1,600 last Friday and suggested there were good times ahead. The China news broke on Sunday and the Russell returned to a 5-week intraday low on Thursday. The correction level at 1,566 is getting more play than a game at Chucky Cheese with the index closing just over that level once again.



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


CY - Cypress Semiconductor
The long position was stopped at $16.65.

TRN - Trinity Industries
The long position was entered at the open on Monday.

AOBC - American Outdoor Brands
The long stock position was stopped at $9.50.

SIG - Signet Jewelers
The long-put position was stopped at $23.75.


BULLISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news. shares dropped in the weak market to stop us out of the stock position. I am recommending we close the option position. After the drop there is little hope of the option becoming profitable.

Original Trade Description: April 27th.

American Outdoor Brands Corporation designs, manufactures, and sells firearms worldwide. The company's Firearms segment offers handguns, long guns, handcuffs, suppressors, and other firearm-related products under the Smith & Wesson, M&P, Performance Center, Gemtech, and Thompson/Center Arms brands. It also sells parts purchased through third parties; operates a private law enforcement training facility; and provides manufacturing services to other businesses under the Smith & Wesson and Smith & Wesson Precision Components brands. This segment sells its products to gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies. The company's Outdoor Products & Accessories segment offers reloading, gunsmithing, and gun cleaning supplies; stainless steel cutting tools and accessories; flashlights, tree saws, and related trimming accessories; shooting supplies, rests, and other related accessories; apparel; vault accessories; laser grips and laser sights; and a range of products for survival and emergency preparedness, as well as field rests, knives, gun vises, hearing protection products, camping and survival gears, and case tumblers. It provides its products under the Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, Bubba Blade, UST, and KeyGear brands. The company markets its products through dealers, retailers, in-store retail channels, and range operations; social and electronic media; in-store retail merchandising systems and strategies; and Websites and online retail stores. The company was formerly known as Smith & Wesson Holding Corporation and changed its name to American Outdoor Brands Corporation in January 2017. The company was founded in 1852 and is based in Springfield, Massachusetts. Company description from FinViz.com.

Every time some idiot goes berserk with a firearm the anti-gun crowd ramps up their attack on lawful gun owners. It does not seem to matter that 270 million gun owners in the US have not broken the law but they want to change the laws because of individuals that don't obey the laws anyway. Murder is against the law, but these violators do not care.

The ensuing efforts to ban guns always sends millions of people into the gun stores to buy guns while they are still legal. The stocks of gun makers rally for 6-9 months and then fall back into dormancy.

The shooting in New Zealand and others have triggered the current wave of proposed laws. The FBI reported that Federal background checks rose from 2,053,886 in February to 2,644,851 in March. That is the biggest spike in Feb-Mar number since the reporting began in 1998. April is likely to be even larger.

Shares of Ruger gained $3 for the week and AOBC, formerly Smith and Wesson, closed at a two-month high. As these numbers are more widely reported and the April numbers show another increase, the gun stocks are likely to continue higher.

Earnings June 6th.

Position 4/29:
Long AOBC shares @ $9.97, see portfolio graphic for stop loss.
Optional: Long June $11 call @ 30 cents, see portfolio graphic for stop loss.



CY - Cypress Semiconductor - Company Profile

Comments:

Monster drop on the Intel guidance warning to stop us out again.

Original Trade Description: May 4th.

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.

Cypress reported adjusted earnings of 27 cents that beat estimates for 24 cents. Revenue of $539 million beat estimates for $535 million. The company guided for Q2 revenue of $515-$545 million and earnings of 22-26 cents. Analysts were expecting $528 million and 24 cents. That put them right in line with estimates.

Position 5/6:
Closed 5/9: Long Sept $18 call @ $1.10, exit .67, -.43 loss



INO - Inovio - Company Profile

Comments:

INO reported a loss of 30 cents that missed estimates for 29 cents. Revenue of $2.8 million was a big miss of $4.4 million analysts expected. Shares fell and our option will likely expire worthless.

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.

Update 4/20: Inovio published new data on their cancer killing T-Cell engagers. The DNA encoded Bi-specific T Cell Engagers cleared established tumors in preclinical studies. One dose of the drug lasted for months compared to only hours for the current versions.

Position $4/4/19:
Long May $4 call @ 30 cents, see portfolio graphic for stop loss.

Previously Closed 4/17: Long INO shares @ $3.86, exit $3.85, -.01 loss.



PSTG - Pure Storage - Company Profile

Comments:

No specific news. The decline in the market has taken this stock well below resistance and with only a week to go. Without a miracle this will expire worthless. I am dropping it as a total loss.

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:
Dropping: Long May $25 call @ 40 cents, likely to expire, -.40 loss.

Previously Closed 4/22: Long PSTG shares @ $23.40, exit $22.45, -.95 loss.



TRN - Trinity Industries - Company Profile

Comments:

We were

Original Trade Description: May 4th.

Trinity Industries, Inc. provides rail transportation products and services in North America. It operates through three segments: Railcar Leasing and Management Services Group, Rail Products Group, and All Other. The Railcar Leasing and Management Services Group segment leases freight and tank railcars; originates and manages railcar leases for third-party investor-owned fund; and provides fleet maintenance and management services to industrial shippers. As of December 31, 2018, it had a fleet of 99,215 owned or leased railcars. This segment serves industrial shipper and railroad companies operating in agriculture, construction and metals, consumer products, energy, and refined products and chemicals markets. The Rail Products Group segment provides freight and tank railcars for transporting various liquids, gases, and dry cargo; and offers railcar maintenance services. Its railcars include autorack, box, covered hopper, gondola, intermodal, open hopper, and tank cars. This segment serves railroads, leasing companies, and industrial shippers of products in the agriculture, construction and metals, consumer products, energy, and refined products and chemicals markets. The All Other segment manufactures guardrail, crash cushions, and other highway barriers; and engages in the captive insurance, transportation, and other peripheral businesses. The company sells or leases products and services through its own sales personnel and independent sales representatives. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.

This is a simple play. Trinity reported earnings of 24 cents that beat estimates for 20 cents. Revenue of $604.8 million missed estimates for $674.9 million. They guided for full year earnings of $1.15-$1.35 and that put the midpoint of $1.25 below analyst estimates for $1.31.

They also affirmed full year production targets of 23,500-25,500 railcars. However, they deleted 3,050 railcars from their backlog because of the weak financial condition of the buyer. It was assumed to be an energy company. The cars were not scheduled to be delivered in 2019 so it has no impact on their earnings forecast.

Shares were hammered for a $3 loss to $21. After spending five days in the doghouse shares are starting to rebound. Analysts believe the price drop was an overreaction on a solid company with a great business.

Buy July $23 call, currently 70 cents, no initial stop loss.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Rebound stalled in the weak market.

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.

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 August $9 call @ 75 cents, see portfolio graphic for stop loss.

Previously closed 4/15: Long VIPS shares @ $8.19, exit $7.85, -.34 loss.



BEARISH Play Updates

BHGE - Baker Hughes GE - Company Description

Comments:

BHGE announced a quarterly dividend of 18 cents payable May 31st to holders on May 21st. Shares closed at a 4-month low. This is a May option so I am recommending we close it on Monday at the open.

Original Trade Description: April 20th.

Baker Hughes, a GE company provides integrated oilfield products, services, and digital solutions worldwide. Its Oilfield Services segment offers drilling, wireline, evaluation, completion, production, and intervention services; and drilling and completions fluids, completions tools and systems, wellbore intervention tools and services, artificial lift systems, pressure pumping systems, and oilfield and industrial chemicals for integrated oil and natural gas, and oilfield service companies. The company's Oilfield Equipment segment designs and manufactures products and services, including pressure control equipment and services, subsea production systems and services, drilling equipment, and flexible pipeline systems; and onshore and offshore drilling and production systems, and equipment for floating production platforms, as well as provides a range of services related to onshore and offshore drilling activities. Its Turbomachinery & Process Solutions segment provides equipment and related services for mechanical-drive, compression, and power-generation applications across the oil and gas industry, as well as products and services to serve the downstream segments of industry. Its product portfolio includes drivers, compressors, and turnkey solutions; and pumps, valves, and compressed natural gas and small-scale liquefied natural gas solutions. This segment serves upstream, midstream, onshore and offshore, industrial, engineering, procurement, and construction companies. The company's Digital Solutions segment provides sensor-based measurement, non-destructive testing and inspection, turbine, generator and plant controls, and condition monitoring, as well as pipeline integrity solutions for a range of industries, including oil and gas, power generation, aerospace, metals, and transportation. It serves through direct and indirect channels. The company is based in Houston, Texas. Baker Hughes, a GE company is a subsidiary of General Electric Company. Company description from FinViz.com.

On Thursday energy services giant Schlumberger (SLB) reported earnings of 30 cents that matched estimates. Revenue rose only slightly to $7.879 billion but it was enough to beat estimates for $7.810 billion. Both numbers were lower than the prior quarter. The company projected lower activity in land rigs in North America and seasonal slowness in international markets. North American revenue was down -3% because of pricing weakness. They do expect the overall market to improve as production cuts overseas take effect. They also warned that four years of slowing investment in the sector would result to lower services activity in the years ahead.

If Schlumberger is struggling in this energy market then Baker Hughes GE will be struggling as well. Shares rallied with oil prices early in 2019 but now that prices have stabilized and we are losing 10 active rigs a week, their earnings should be suffering.

They make a lot of money from fracking and completing wells. With drilled and uncompleted wells now over 8,500 there is plenty of work but that number is growing instead of declining. That means production companies are not completing them. With pipelines at capacity there is no reason to spend a couple million dollars completing a well only to have it sit idle because you can't get the oil to market.

I suspect Baker Hughes is going to disappoint when they report earnings on April 30th. I am recommending we buy an inexpensive put option and hold over the report. The May $25 put is relatively inexpensive.

Update 5/3: BHGE reported earnings of 15 cents that nearly doubled the year ago quarter at 9 cents. However, cash flow was negative -$419 million compared to estimates for +$188.5 million. Shares declined sharply on the news but rebounded slightly on Friday.

Position 4/22:
Long May $25 put @ 65 cents, no stop loss.



GME - Gamestop - Company Description

Comments:

New low on the stock but this is a May option so I am recommending we close it at the open on Monday.

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.



SIG - Signet Jewelers - Company Description

Comments:

No specific news. We closed the short stock position at the open on Monday and we were stopped on the long put position on Tuesday to exit the play.

Original Trade Description: April 13th.

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.

Position 4/15/19:
Closed 5/6: Short SIG shares @ $23.18, exit $22.46, +.72 gain.
Closed 5/7: Long July $20 put @ $1.35, exit $1.17, -.18 loss.



VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Big week for the VXXB with a spike from $25 to $31. The shares fell back on Friday in the market rebound to post a 7.73% decline. It will probably take us weeks to make a new low but it will happen.

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.