Option Investor

Daily Newsletter, Saturday, 5/18/2019

Table of Contents

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

Market Wrap

Trade or No Trade?

by Jim Brown

Click here to email Jim Brown

Trade talks have come to a halt and hostile headlines are increasing.

Weekly Statistics

Friday Statistics

The market rebounded from a 204-point drop at Friday's open to +94 gain at 11:00. The futures were down hard over worries about China trade talks. News that President Trump was likely to push off a tariff decision on autos from the EU and other countries until November, helped diffuse some of the tension. Later in the morning there were rumors the steel and aluminum tariffs against Canada and Mexico would be lifted. These rumors allowed the Dow to rebound nearly 300 points from the lows.

Unfortunately, late in the day news broke there were no further talks scheduled. Hostile headlines were increasing from both sides and suggesting it could be a long time before talks resumed or made any progress. China was calling the US "insincere" and said President Trump was trying to "bully" China. President Trump tweeted that China was not negotiating in good faith and had broken prior agreements on points that put the talks back to the beginning. The Chinese government has suddenly shifted to a nationalism stance. On Saturday they preempted regular TV to run two documentary specials touting the Chinese fighting against the US in the Korean War. China abruptly cancelled purchases of 3,247 tons of American pork.

Before talks can be rescheduled, they first must agree on what to discuss. China has reportedly refused to discuss the points where the prior agreement had changed. They are clearly trying to buy time until they can gauge the outcome of the election. If it appears Trump is going to win again, they will probably come back to the table. If it appears someone else is going to win, they will endure the pain and wait out the election in hopes of getting a better deal with the new president.

The market was not happy with these revelations. Instead of a quick fix and back to the table with conditions as before, it looks like months of negative headlines and contentious meetings lay ahead. On Saturday White House officials tried to calm tensions saying talks could resume in 4-5 weeks. There have also been comments that President Trump would meet President Xi at the June 20th G20 meeting, but Chinese officials rebutted that saying there was no scheduled meeting between the two.

The bottom line is that the trade war is ramping up and there is nothing on the horizon for traders to focus on as a solution.

One factor influencing trade decisions is the sharp drop in the value of the Chinese yuan. The chart compares the Yuan to the dollar and 7:1 is a critical historical level. On this chart, higher is bad because it takes more yuan to buy a dollar. The currency fell so sharply over the last two weeks some analysts believe China has removed the supports and is letting the currency decline to offset the impact of the tariffs. A dollar will buy more goods priced in yuan which effectively means Chinese goods are on sale. Analysts were afraid China would lower the value of their currency to offset the tariffs and it appears to be happening whether the Chinese government is a motivator or not.

The US dollar rallied back to 98 on the Dollar Index and close to the two-year highs from April. The rising dollar compared to the falling yuan is going to be a benefit for China. Stronger dollars buy more yuan denominated goods. Unfortunately, it means less sales of dollar denominated goods to other nations. It makes our goods more expensive. This will be a serious headwind for Q2 earnings. Walmart said they would lose $1 billion in Q2 sales because of the strong dollar.

Consumer sentiment spiked more than 5 points to 102.4 in May. That is the highest level since January 2004. The present conditions component rose only fractionally from 112.3 to 112.4 but the expectations component spiked 9 points from 87.4 to 96.0 and a 15-year high. This survey was prior to the recent trade war conflict and the numbers are likely to decline sharply in the late month revision.

The strong job market is supporting sentiment and that shows no signs of ending. Jobs are plentiful, wages are rising and unemployment is at a 60 year low. The equity market was testing new highs when this survey was done.

The Conference Board's leading indicator report showed a +0.2% rise in April after similar gains in the prior two months. Employment, unemployment claims, retail sales, new manufacturing orders and equity prices all contributed to the rise. The steady gains suggest the economy is healthy and growing.

However, the Atlanta Fed real time GDPNow forecast for Q2 took a sudden turn for the worse on Wednesday when the retail sales for April fell unexpectedly by -0.2% from a +1.6% rise in March. The hit to sales came from building materials with a -1.9% drop due to the unseasonably cold wet weather seen on both coasts in April. This limited construction and remodeling activity to indoors. Electronics fell -1.3%. Gasoline stations rose 1.8% because of the rise in oil prices.

The hit from building materials will reverse in May as warmer weather arrived.

There is just enough weakness in the economic reports along with the trade disaster to cause the Fed funds futures to completely price out a rate hike through January. There is only a 21.6% chance that rates will not be lower by year end. There is a 37% chance of two cuts and 76% chance of one rate cut before the end of 2019.

We have a very skinny economic calendar for next week with only two home sales reports and two regional Fed reports. The highlight will be the FOMC minutes on Wednesday. Analysts do not expect to find any undiscovered nuggets of wisdom regarding future rate cuts, but they will be looking. Given the futures forecast, they may be looking even harder than normal.

Dow component Home Depot reports earnings on Tuesday and quite a few analysts expect a miss and possibly lower guidance because of the weather-related weakness in building materials. Lowe's will follow up on Wednesday. Target will try to pull out of its dive when it reports on Wednesday. Shares have been in crash mode since Amazon announced one-day delivery to Prime members.

The Hewlett Packard twins will both report on Thursday and nobody expects any surprises. PC sales are down according to Gartner Group and enterprise cloud is becoming a crowded battleground.

Autodesk would be my favorite for the week. The stock has been very volatile of late and there should be a big move after they report. Autodesk and Adobe are the kings of the software as a service space.

460 S&P companies have reported earnings with a projected Q1 rate of 1.4% growth. This is significantly above the -2% decline forecast at the most bearish phase of this cycle. Some 75% of companies have beaten on earnings and 57% have beaten on revenue with a 5.6% projected growth rate for revenue. The projected growth rate for earnings in Q2 is 1.1% followed by 1.8% in Q3 and 8.1% in Q4. Revenue is expected to average about 4.5% across all three quarters. There have been 55 earnings warnings for Q2 and 17 companies issued positive guidance.

The three big events for last week included Cisco Systems, Walmart and Nvidia. Dow component Cisco reported earnings of 78 cents that beat estimates for 77 cents. Revenue of $13 billion rose 6% and beat estimates for $12.89 billion. For the current quarter they guided for earnings of 81 cents, in line with estimates. They guided for 5.5% revenue growth which beat estimates for 3.5%. As Cisco broadens its offerings from simply hardware to software and managed services it has become less dependent on the hardware cycles. The upgrade to 5G is expected to power an entirely new wave of data traffic and that will require larger and faster network equipment. Cisco said this would benefit sales of their Catalyst 9000 series of switches in future quarters. Shares spiked $4 on the news.

Dow component Walmart (WMT) reported earnings of $1.13 that easily beat estimates for $1.02. However, revenues rose only 1% to $123.925 billion and missed estimates for $124.51 billion. Excluding the impact from currencies they would have reported $125.8 billion. The company warned that currency issues would cost them about $1 billion in sales in Q2.

Same store sales rose 3.4% but e-commerce revenues rose 37%. That was down from 43% in the holiday quarter. They are definitely taking the battle to Amazon. Earlier in the week Walmart announced a free next day delivery service to combat the service from Amazon. Walmart will offer 220,000 frequently purchased items for next day delivery and buyers will not have to be members if the sale is over $35. They expect the service to be operational in 75% of the country by the end of the year.

Nvidia (NVDA) reported earnings of 88 cents that beat estimates for 81 cents. Revenue of $2.22 billion narrowly beat estimates for $2.196 billion. While they beat on both metrics that was a 30% decline in earnings on a 57% decline in revenue. They said they were working through excess inventory and the company was finally back on an upward trajectory. They guided for Q2 revenue in the range of $2.55 billion "plus or minus 2%." Analysts expected $2.537 billion. However, the chipmaker said they would no longer provide full year guidance because "visibility remains low." They will continue to supply current quarter guidance. They admitted a slowdown in the data-center market is not improving and the recovery cannot be forecast.

They said trade tensions with China would not prevent the acquisition of Mellanox (MLNX). This company provides the connections between multiple AI computers to create monster AI networks.

Nvidia shares rose 7% in the afterhours session until they announced the end of annual guidance and refused to affirm prior guidance due to the data-center weakness. Analysts are worried that the massive cloud buildout of the last several years has peaked. Shares collapsed to lose $3.66 for the day on Friday.

Readers know that I am always positive on Nvidia because I understand the impact their technology is having on the future. They may actually be too far advanced and the rest of the technology sector has not yet caught up enough to generate higher demand. They are so high performance that only the largest and most technically advanced applications can get full use out of their chips. They still make high performance video cards for gaming PCs but the move to browser-based gaming where PCs do not need high performance video cards, could dent demand on that level. Their cards will still be in demand for high performance workstations or CAD development but that is a much smaller niche. The chip sector is in decline because of warnings from several chip makers. Nvidia is declining with the sector. I would look to pick up some Nvidia shares or LEAPS around $140.

Applied Materials (AMAT) reported earnings of $70 cents that beat estimates for 66 cents. Revenue of $3.54 billion, fell $1 billion but beat estimates for $3.50 billion. They guided for current quarter earnings of 67-75 cents and analysts were expecting 70 cents. Revenue guidance of $3.67 billion beat estimates for $3.5 billion.

The company said capital spending on wafer equipment would decline in 2019 but they expected business to rebound in 2020. Competitors KLA Tencor (KLAC) and Lam Research (LRCX) both gave similar guidance for 2019 and 2020. Applied Materials said they expect "good growth" in 2020. They said chip complexity is slowly rising and it takes more equipment to produce each succeeding version of a chip, especially DRAM and NAND memory. AMAT shares posted a decent gain on Friday despite a big decline in the Semiconductor Index.

Beyond Meat (BYND) shares finally took a breather after a surging to $90 from its IPO price of $25. The stock cooled after noted short seller Citron Research tweeted that Beyond Meat had become Beyond Stupid and should decline $30% from Thursday's close. In a tweet Citron said the market cap of Beyond now exceeded that of the entire industry. As of Friday's close the company has a $5 billion market cap and is expected to report only $40 million in sales for the quarter. They are also expected to post a 15-cent loss. They are trading at 31 times expected annual sales and they are a food company. A sector that normally trades in single digit multiples. They do have a good product that is likely to take market share from competitors and the meat industry BUT it is going to take a long time.

Options have begun trading, but the cost is prohibitive. With BYND at $90, the June, front month, $85 put is $10.20. The next available month is August and the same put is $19.80. This is crazy and it will fade.

Elon Musk sent a memo to employees saying the company only had 10 months of cash at the Q1 burn rate and he was going on a "hard core" cost cutting program. Tesla just raised $920 million in a bond sale in March to bring their cash balance up to $2.2 billion. That is a lot of money unless your cash burn rate is $3 billion a year.

Tesla may be flaming out. With 17 different EV models being released by competitors over the next 24 months, Tesla is no longer the only game in town. Other companies are not having delivery problems and their cars are sold in showrooms alongside gasoline powered cars. Every dealer is also a repair shop and there are no waits for multiple weeks for repairs and parts. Tesla demand is slowing and along with it cash flow is slowing.

Musk has blown his chance at being the leading EV manufacturer in a high-volume industry. Everybody knows he is an innovator but using his own words he sucks at being an auto manufacturer. With the potential to run out of cash ten months from now there will either be another massive capital raise, which may not go well, or he is going to be forced to look for deep pocket investors like his friends in Saudi Arabia. I would not be surprised to see Tesla acquired over the next couple of years. So when will the semi-truck, pickup and Model Y SUV become available? Don't forget the $250,000 Roadster with 0-60 in 1.9 seconds, 250 mph and 620-mile range. It was announced in November 2017 and I would not expect to see that in the near future. Full payment in advance to confirm reservation.

Musk said he was going to aggressively cut costs. Maybe he should start with his $530 million compensation package the board gave him. I believe we are going to see shares below $200 very soon. The October 2016 low was $180. That is the current target and a breakdown there would target $150. The bloom is definitely off this rose.

Lukin Coffee (LK) is a fast-rising competitor to Starbucks in China. The company is less than two years old and has 2,400 locations with plans to reach 5,000 locations in 2019. These are small format stores with very little seating. They do not accept cash. All orders are made and paid through an app. The drinks are highly discounted through coupons served through the app. One reporter said she got 14 coupons when she registered for the app. The discounts allowed her to buy a latte for the discounted price of 69 cents rather than the $4 Starbucks charges. The concept is for busy Chinese shoppers and business people to order a drink and pick it up in a takeout container. They also offer a lot of flavored teas, which is still the staple drink in China.

They priced their IPO at $17 and shares spiked to $26 at the open. They faded to $20 at the close in a negative market.

Uber shares recovered from the $9 post IPO plunge but now that options have begun trading, we could see a longer-term trend appear. Unlike BYND the options on Uber are reasonable for a June $40 put at $2.05 with UBER shares at $41.91. Nothing has changed since last week. The company is still losing billions of dollars and their only way to boost revenue is to raise prices and cut driver pay. That is a recipe for disaster, but it is the only one they have. While they may succeed in offering additional services like Uber Freight, they are a long way from making money on it. I look for Uber to retest its lows soon.

Apple (AAPL) shares are holding just above $185 and $30 below their high for May at $215. The China trade disaster is weighing on Apple shares. Their market share in China is falling. The nationalism against American companies is rising. The import tariff on Chinese made iPhones rose from 10% to 25% on May 10th. The impact is estimated to be as much as $160 per phone. With the summer doldrums ahead and six more weeks of China trade headlines, we could easily see Apple retest $175. Nomura agrees with my outlook and cut their price target to $175 on Friday. They said tariffs could cut Apple's earnings by 20%. Apple would have to raise prices in the US by 17% to recover the 25% tariff. With iPhones already at the upper bound on US pricing they do not have room to raise prices close to $1,300. The market will not support it.

Oil prices were relatively calm last week despite the Iranian headlines. There was a minor bounce on Thursday but faded slightly on Friday. Contrary to historical trends inventories are not declining and refinery utilization just barely broke 90% for the second time this year. We should be approaching 95% only two weeks before Memorial Day and prices should be rising.

Active rigs declined -1 with oil rigs falling -3 and gas rigs gaining one. All quiet in the energy sector.

Drilled but uncompleted (DUC) wells declined by 43 in April but remain at record levels. There is no reason for producers to drill lots of new wells when their backlog remains so high. That is why the rig count has been in decline.


Whenever there is a big decline, we should always expect a material rebound before another decline to lower lows. Those investors looking for a buying opportunity see the first decline and buy the dip. Seeing the rebound, shorts are forced to cover. Normally after a couple days the rebound falters for lack of volume and the shorts become brave again and begin selling stock. Prior holders who did not want to take a big loss on the first decline have had time to reconsider market direction and begin to unload when the rebound fizzles out.

Obviously, I could describe that scenario in a variety of ways but that is the most likely outcome of our present situation. I believe we are in the "eye of the storm" and future headlines or lack thereof will lead to another decline to lower lows. The fury of the first crash has passed and last week was rather tame. Resistance was met on Thursday and Friday saw traders moving to the exits on negative trade news.

While the president will try to put some lipstick on the trade pig, it is still a stinky pig and until a positive outcome is seen forming, the market should react negatively.

Add to that the sell in May trend and the beginning of the summer doldrums on June 1st. Schools will be out, family vacations will be starting and investors will be focused elsewhere. Nobody wants to go on vacation with a portfolio full of longs when the geopolitical situation is so negative.

The S&P has multiple levels of strong resistance from 2,868 through 2,900. The index has failed at 2,885 on each of the last two days. The obligatory rebound has occurred and we could be in the process of rolling over. Support is 2,800 and 2,776 and the 200-day.

The Dow dropped to the 100-day average where it tested that level on three consecutive days. Thursday's gap open propelled it to resistance at 25,950 where it failed on Thursday and Friday. The 50-day is 26,066 with resistance from late 2018 at 25,826. There are multiple resistance levels from where we are now to the very strong resistance at 26,616. We are not likely to suddenly charge higher and bust through all those levels.

The Nasdaq performed a perfect rebound from support at 7,645 and surged to resistance at 7,945. On Friday the index tried to return to that resistance and failed. The Nasdaq closed back below the 50-day and presents a perfect picture of a normal bear market rebound. The big caps normally supporting a rally were seriously negative on Friday. The falling chip stocks were dragging the tech sector lower.

The key question this weekend is "would you buy this chart?" Since the small caps normally lead the broader market and they closed just above the 7-week low from Monday, the path of least resistance is down. The 200-day average was solid resistance over the last two days. The odds are good the Russell is going to break below the 100-day and retest 1,500. That is the critical line in the sand.

While I am bearish on the market, that outlook and $4 will only buy you a bad cup of coffee at Starbucks. Nobody knows where the market is going but the negative geopolitical events seem to be growing. At any time, we are only one tweet away from a major rally or a major crash. With most of the macro issues pointing to further weakness I would recommend buying the dips only for trading positions. We could get lucky and have a tweet or White House headline predict a swift resolution but until you hear that from a Chinese official, I would have a hard time believing it. Expect continued weakness and be thankful if a rally appears.

Enter passively and exit aggressively!

Jim Brown

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George Lucas

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New Plays

Think Longer Term

by Jim Brown

Click here to email Jim Brown
Editor's Note

Think longer term to avoid market volatility. After basing for 10 months Ford could be ready to make a move but there is no sign it will be this week. Postponement of auto tariffs and cancelling steel and aluminum tariffs should help. Mallinckrodt has a world of problems on their doorstep and having a profitable business does not help.


F - Ford Motor Co - Company Profile

Ford Motor Company designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, and electrified vehicles worldwide. It operates through three segments: Automotive, Mobility, and Ford Credit. The Automotive segment sells Ford and Lincoln vehicles, service parts, and accessories through distributors and dealers, as well as through dealerships to commercial fleet customers, daily rental car companies, and governments. The Mobility segment designs and builds mobility services; and provides self-driving systems development and vehicle integration, autonomous vehicle research and engineering, and autonomous vehicle transportation-as-a-service network development services. The Ford Credit segment primarily engages in vehicle-related financing and leasing activities to and through automotive dealers. It provides retail installment sale contracts for new and used vehicles; and direct financing leases for new vehicles to retail and commercial customers, such as leasing companies, government entities, daily rental companies, and fleet customers. This segment also offers wholesale loans to dealers to finance the purchase of vehicle inventory; and loans to dealers to finance working capital and enhance dealership facilities, purchase dealership real estate, and other dealer vehicle programs. Ford Motor Company was founded in 1903 and is based in Dearborn, Michigan. Company description from FinViz.com.

Ford shares have stalled at $10.40 after an earnings pop back in late April. Of Friday president Trump cancelled the tariffs on steel and aluminum from Canada and Mexico. That is positive for auto makers. The president also postponed tariffs on cars and auto parts, also positive for automaker earnings.

Ford is spending $11 billion to produce 40 different models of hybrid and electric vehicles by 2022. One of those vehicles is the new 2020 Explorer hybrid with a 500 mile range and a gas sipping 4-cylinder engine to keep the battery charged. Their new vehicle lineup also includes an electric F150 pickup, the most popular truck on the road.

When Ford shares break over the $10.50 level after building a 10-month base, we could see some decent gains. $12 would be the next resistance level. Options ar every cheap but don't expect a sudden surge to $20. Look for a double or triple and then exit.

I am not recommending a long stock position because this could be a slow mover. I would rather use the cheap option where we do not have much at risk in case the stock remains dormant for weeks.

Buy September $11 call, currently 32 cents, no initial stop loss.


MNK - Mallinckrodt Plc - Company Description

Mallinckrodt plc, together with its subsidiaries, develops, manufactures, markets, and distributes specialty pharmaceutical products and therapies in the United States, Europe, the Middle East, Africa, and internationally. It operates in two segments, Specialty Brands, and Specialty Generics and Amitiza. The company markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and gastrointestinal products. It offers H.P. Acthar Gel, an injectable drug for various indications, such as rheumatoid arthritis, multiple sclerosis, infantile spasms, systemic lupus erythematosus, polymyositis, and others; Inomax, a vasodilator to enhance oxygenation and reduce the need for extracorporeal membrane oxygenation; Ofirmev, an intravenous formulation of acetaminophen for pain management; and Therakos photopheresis, an immunotherapy treatment platform. The company is also developing Terlipressin for the treatment of hepatorenal syndrome; StrataGraft, which is in Phase III and II clinical development for the treatment of burns; Stannsoporfin, a heme oxygenase inhibitor for the treatment of jaundice; Xenon gas for inhalation; MNK-6105 and MNK-6106, an ammonia scavenger for the treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia; VTS-270 that is in Phase III development for Niemann-Pick Type C, a neurodegenerative disease; and CPP-1X/sulindac, which is in Phase III development for Familial Adenomatous Polyposis. It markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. It has collaboration with the Washington University School of Medicine in St. Louis. The company was founded in 1867 and is based in Staines-Upon-Thames, the United Kingdom. Company description from FinViz.com.

MNK reported earnings of $1.94 that beat estimates for $1.70. Revenue of $790.6 million rose 4.7% and beat estimates for $766.3 million. They raised their full year guidance from $8.10-$8.40 to $8.30-$8.60.

So why are MNK shares falling to new lows? MNK was named in the latest suit by 44 attorney general as one of 12 companies involved in a price fixing scam on generic drugs. They reportedly inflated drug prices by as much as 1,000%. The case claims the alleged illegal activity was "pervasive and industry wide." A press release on Monday tanked the sector.

Not only is MNK under attack by the price fixing suit but they are involved in eight other specific investigations on generic drug pricing and the persistent opioid drug investigation. They are in serious trouble because regulators and attorneys general don't launch investigations unless they are relatively sure there is cause. I would not be surprised to see MNK in the $5 range as these events heat up.

Buy July $14 put, currently $1.25, no initial stop loss.

In Play Updates and Reviews

7-Week Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap Russell hit a 7-week low on Monday as bearish sentiment increased. The index rebounded from 1,520 to 1,567 mid-week but fell back to 1,536 at the close on Friday. Small cap sentiment is weakening and the internals are bearish. This should predict a continued decline in the big caps but we are only one tweet away from a rally or a crash. Fundamentals do not apply.

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

BITA - BitAuto
The short position was entered at the open on Monday.

BHGE - Baker Hughes GE
The short position was entered at the open on Monday.

AOBC - American Outdoor Brands
The long position was closed at the open on Monday.

GME - Gamestop
The long-put position was closed at the open on Monday.

VIPS - Vipshop Holdings
The long-call position was stopped at $8.25.

INO - Inovio
The long-call position expired on Friday.

BULLISH Play Updates

AOBC - American Outdoor Brands - Company Profile


No specific news. We closed the long call position at the open on Monday for lack of movement.

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:
Closed 5/13: Long June $11 call @ 30 cents, exit 7 cents, -23 cent loss.

Previously closed 5/7: Long AOBC shares @ $9.97, stopped $9.50, -.47 loss.

INO - Inovio - Company Profile


We were holding the inexpensive May option in hopes for a post earnings bounce. That did not happen and the option expired 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.

Update 5/11: 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.

Position $4/4/19:
Expired 5/17: Long May $4 call @ 30 cents, expired, -30 cent loss.

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

TRN - Trinity Industries - Company Profile


Trinity shares declined after Genesee & Wyoming posted lackluster traffic in April. Weak rail demand would impact Trinity orders. I considered closing it but the option is cheap and we have two months.

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


No specific news. The China news last weekend caused a knee jerk reaction on Monday to stop us out. This is a Chinese stock.

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


Because of our profitable May option we closed the position at the open on Monday.

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.

Update 5/11: 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.

Position 4/22:
Closed 5/13: Long May $25 put @ 65 cents, exit $2.95, +2.30 gain.

BITA - BitAuto Holdings - Company Description


No specific news. Minor oversold bounce with the market.

Original Trade Description: May 11th

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.

Position 5/13:
Short BITA shares @ $10.87, see portfolio graphic for stop loss.
Optional: Long July $10 Put @ 85 cents, see portfolio graphic for stop loss.

GME - Gamestop - Company Description


This was a may option and we closed it at the open on Monday at a 15-year low.

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:
Closed 5/13: Long May $10 put @ 65 cents, exit $1.47, +.82 gain.

VXXB - Barclays VIX Futures ETN - ETN Description


Huge volatility spike over the last two weeks but even with the market decline on Friday the VXXB closed near two week lows. Traders are tiring of the market 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.