Option Investor

Daily Newsletter, Saturday, 6/1/2019

Table of Contents

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

Market Wrap

Sold in May

by Jim Brown

Click here to email Jim Brown

The normal sell in May trend was active in 2019 but was driven by outside events not normal profit taking.

It has been a bad five weeks for the Dow with a combined decline of -1,722 points. That is a -6.9% decline since the April 23rd close at 26,656. I added the fourth week to the graphic below. The May 3rd week only lost 32 points. This is the Dow's longest consecutive losing streak since 2011.

Weekly Statistics

Friday Statistics

The new tariffs on Mexico were a bolt of lightning from a clear sky as nobody even remotely considered that a possibility. Only two days before the USMCA replacement for NAFTA was fast tracked and all was right with the world at least in North America. The lightning strike disrupted an already weak market and caused a -1.5% drop in the indexes on the last day in May. For the week the markets lost 2.5-3.0%. For the month the Dow lost -6.7%, S&P -6.6%, Nasdaq -7.9% and the Russell lost -7.9%.

An average year has two declines of 5% or more. Normally when May is down hard, June sees a decent rebound. This is not a normal year or a normal market. We are always just one tweet away from a massive short squeeze or a market crash. The Mexican tariff tweet was a prime example.

Some analysts are saying the coast could be clear for a rebound because the worst news is over. I disagree. China is going to lay out their trade claims in a white paper on Sunday and officials will take questions. This is unheard of in China where information is tightly controlled. This suggests there could be some blockbuster points in the release and signs of a government position that is even more resolute in not giving in to US demands. China has likely made the decision to try and wait for the US elections in hopes there is a new president in 2020. The eighteen month wait would be painful but the results of dealing with a democrat president would be preferable than what they are facing now.

The market is not immune to these bolts from the blue and there will always be a knee jerk reaction. Eventually after enough hits, investors will become vaccinated and they will welcome the dips to buy. Unfortunately, we are not there yet.

We are reaching levels where we should see a response from fund managers and technical traders. The 2,750 level is the year end target for multiple analysts and a level that is considered fairly valued for the S&P. A break below that level becomes a buying opportunity and that increases as we approach 2,625, which would be a strong buy zone.

Needless to say, the potential test of 2,750 next week is going to be critical. Given the recent decline and now oversold conditions, there is a good chance for at least a short-term bounce. We hope it works out better than the similar bounce from 2,800.

Friday was a good day for economic reports. The final consumer sentiment revision for May declined slightly from the first reading at 102.4 to a flat 100. That is still a great number. Analysts believe the flare up in the trade war with China was responsible for the minor decline. In early May everyone was expecting a deal to be imminent.

The present conditions component declined from 112.3 to 110.0 and the expectations component rose from 87.4 to 93.5 and a 15-year high. The strong job market and surging wage growth is responsible in part for the strong sentiment.

Personal income for April rose +0.5% and the second largest gain in a year. Analysts were only expecting a 0.3% rise. Wages and salaries rose 0.3% after a 0.4% gain in March. Wages are up 1.8% over just the last six months. Disposable income is up 3.8% over the last 12 months.

Personal spending was flat after a +0.7% rise in March. Spending on durable goods declined -0.4% and nondurable goods spending rose +0.3% with a -0.1% decline in services spending. The recent decline in gasoline prices is a good sign because it means once consumers believe fuel prices are stable at lower levels, they will spend that money on goods of some form. The savings rate rose slightly from 6.1% to 6.2%.

Continued blows to consumer sentiment will also cause a slowdown in consumer spending.

The Fed's preferred measure of inflation, the PCE Deflator, rose +0.3% after a +0.2% rise in March. On a trailing 12-month basis the PCE is showing only 1.5% inflation with the CORE PCE rising 1.6%. Durable goods inflation declined -0.4% and the third consecutive monthly decline.

The tame inflation and weak economic numbers in some areas suggests the next Fed move is going to be a rate cut. The consensus is now for two rate cuts before year end. There is a 96.2% chance of one cut and 79% chance of two cuts according to the Fed funds futures. The bar with the blue checkering is the current rate.

The various geopolitical issues and global economic weakness has pushed yields lower around the world. The US 10-year yield fell to a 21-month low at 2.14% on Friday. The Spanish ten-year yield fell to 0.718% and the London Gilt fell to 0.888%. The German Bund is negative at -0.207%. Around the world there is more than $7 trillion in sovereign debt with negative yields. That is not a sign of a rebounding global economy.

We have a busy economic calendar for next week with multiple payroll reports and two ISM reports. Despite the jobs blowout last month with 275,000 jobs on ADP and 263,000 on the Nonfarm report, the estimates are still hovering in the 175,000-180,000 area. Analysts are not going out on a limb with their forecasts.

The ISM numbers are expected to be flat but still in expansion territory. Construction spending should improve but factory orders are expected to decline due to uncertainty about the trade issues.

The Fed Beige Book comes out two weeks before the FOMC meeting. It is produced by a different Fed region each time and contains the anecdotal evidence of business activity in each of the 12 Fed regions. They could contain some weakness based on a slowdown in home prices and sales and declines in auto manufacturing.

The Mexican tariff news crushed the automakers, auto parts companies, truckers, railroads and even the consumer products companies like Colgate, Procter and Gamble and beer distributors including Constellation Brands. Chipotle Mexican Grill (CMG) lost $18 because the cost of avocados just went up.

Automakers were the hardest hit. The top four manufacturers build more than 625,000 cars a year in Mexico and import them back into the USA. Even worse for them, they have parts and assemblies that cross the border as many as 7 times during the manufacturing process. At 5% each time they move back into the US, that could get very expensive.

Mexico is a top trading partner. We import $93 billion in vehicles, $26 billion in agricultural products, $64 billion in computer products, $63 billion in machinery, $60 billion in auto parts and $16 billion in oil and gas. An extended tariff implementation will be painful for the US consumer. Contrary to White House claims, the tariffs are paid by importers, not the Mexican government. Those importers will pass those costs on to US consumers.

What it does do is incentivize importers to look for alternate sources of supply. If they think the tariffs are going to be lasting, they can move their manufacturing facilities. Pepsi just announced a couple weeks ago they were going to build a $4 billion facility in Mexico. I wonder if they are rethinking that this weekend.

The Mexican Peso was crushed on the news. Mexico lives off the money they receive from manufacturing goods to be sold in America. If this tariff program did ratchet up to 25% as proposed it would eventually cause serious problems for the Mexican economy.

The earnings cycle is nearly over. We only have a few recognizable companies reporting next week. Salesforce.com is on Tuesday and Beyond Meat will report their first earnings as a public company on Thursday.

Ciena, Zoom, Five Below, Gamestop, Ambarella and Box are the supporting cast.

We have seen 491 S&P companies report earnings with an expected final growth rate of 1.5% and 5.6% revenue growth. Of those reported, 75.2% beat on earnings and 57.1% have beaten on revenue. There have been 71 guidance warnings for Q2 and 22 guidance upgrades. Because of the market decline the forward PE has fallen to 16.3 for the S&P. Only 5 S&P companies are reporting earnings this coming week.

Companies reacting from earnings on Friday included Costco (COST) which reported earnings of $2.05 that easily beat estimates for $1.83. Revenue rose 7.4% to $34.7 billion and matched estimates. Same store sales rose 5.5% compared to 4.9% estimates. E-commerce sales rose 22%. This was a good report, but Costco shares were declining on Friday along with the market.

Costco is planning an ambitious path of store openings in China and the recent flare up of tensions could squash those plans. Costco is also at risk for higher prices from the Mexican tariffs, so shares fell $8 on the news but quickly rebounded to recover most of the loss. Analysts believe Costco is preparing to announce a special dividend.

Dell Technologies (DELL) reported earnings of $1.45 that beat estimates for $1.19. Revenue of $21.91 billion missed estimates for $22.6 billion. Results rose because of the Windows 10 refresh continues to power PC sales to businesses. Unfortunately, demand for servers and networking equipment declined. Revenue in the infrastructure solutions group declined -5% and networking revenue fell -9%. A 13% rise in commercial revenue offset a 10% decline in consumer revenue. They ended the quarter with $9.8 billion in cash.

Dell was hammered on Friday because they manufacture computers and computer equipment in Mexico. They actually moved some production from China to Mexico over the last year to escape the China trade war. Shares fell more than 10% on the news.

Dell subsidiary VMWare (VMW) reported earnings of $1.32 that beat estimates for $1.27. Revenue of $2.27 billion rose 13% and beat estimates for $2.24 billion. License revenue rose 12%. Total revenues, including unearned, rose 25%. They guided for the full year for revenue of $10.03 billion and operating margins of 33%. The board authorized a $1.5 billion stock buyback program through January 2021. The existing $1 billion authorization has $243 million remaining. Shares were also hit by the Mexican tariffs.

Uber (UBER) reported its first earning as a public company and they failed to impress. The company reported a loss of $1.01 billion for the quarter of -$2.26 per share. The loss was slightly better than the $1.00-$1.11 billion guidance. Revenue of $3.1 billion matched estimates.

Costs rose 35%. Gross bookings rose 34% to $14.6 billion from Q1-2018. Bookings rose only 3.4% from the prior quarter. Active users rose from 91 million to 93 million quarter to quarter. They did not provide Q2 guidance in the report. Shares rose at the open but quickly sold off with a little short covering at the close.

Dollar Tree (DLTR) overcame a negative market after reporting earnings of $1.14 that matched estimates. Revenue of $5.81 billion narrowly beat estimates for $5.78 billion. Same store sales rose 2.5% at Dollar Tree and 1.9% at Family Dollar. Analysts were expecting 2.1% overall so that matched estimates as well. The company guided for Q2 revenue of $5.66-$5.76 billion and earnings of 64-73 cents. Same store sales are expected in the low single-digits. Analysts were expecting $5.73 billion and 99 cents.

Full year guidance was $23.51-$23.83 billion and earnings of $4.77-$5.07. Analysts were expecting $23.67 billion, earnings of $5.30 and same store sales growth of 2.0%. So here is the problem. They only matched Q1 estimates, missed on Q2 and full year guidance. So why was the stock up $3.28 for the day? They are planning on closing 390 underperforming stores in Q2 and that will impact revenue and earnings, thus the lowered guidance. They are also planning on introducing Dollar Tree Plus, which will have items that cost more than $1 therefore a larger margin. They are also going to add adult beverages to their product offerings. Investors seemed to like the news.

If it is the weekend it must be time for an Apple update. Shares continue to fall on daily downgrades to sales expectations in China and worries about the tariff issue. I had heard that Apple had considered building a manufacturing facility with Foxconn in Mexico. Labor is cheap and importing into the US is by truck not ship or planes. If that was an actual consideration, they may be rethinking that plan.

Despite all the geopolitical issues we are only about three months away from the annual iPhone launch. Other than having three cameras rumored on the iPhone 11, the rest of the launch models are not generating any buzz. Apparently, Apple has run out of new and clever things to add to the iPhone models. There is a cheaper version with an LCD screen that could be a successor to the iPhone XR. Since this generation of phones will not have 5G the excitement is likely to fade quickly. Apple wants investors to focus on services revenue rather than iPhone sales, but phone sales are required to boost services revenue. Shares closed at $175 on Friday, down -17.5% since the May 3rd close. I said last week I would be a buyer in the $170-$175 range but the market must heal first.

The Mexican tariff proposal crushed crude prices for two reasons. We import 680,000 bpd of oil from Mexico. Every 5% increase in the tariff would raise the price to buyers by $2 million a day. More importantly, the potential for a trade war with Mexico in addition to the trade war with China and weak global economy caused traders to worry about future demand. Prices have been weak due to oversupply but a sharp decline in demand could push them significantly lower.

OPEC produced 60,000 bpd less in April because of a 400,000 bpd drop in Iranian exports. Saudi Arabia increased exports by 200,000 bpd to offset the Iranian shortage. There is plenty of oil in inventory and there is no need for any OPEC country to boost production any further.

Russian production is coming back online after the pipelines were sabotaged several weeks ago. More than 20 million barrels of Russian oil was contaminated with a strong corrosive. Those barrels had to be purified and the pipelines cleaned before anyone would buy Russian oil.

US production rebounded to 12.3 million bpd once again to offset the increased demand by refiners.

Shale producers are struggling. With oil prices falling back to the low $50s the pace of activity is going to slow significantly. White Star Petroleum filed for bankruptcy on Tuesday. They are likely to be followed by a dozen more companies. According to Rystad Energy, 8 out of 10 US shale drillers are burning cash. Out of 40 drillers surveyed only 4 had positive cash flow. With oil prices crashing it prevents them from coming back to the equity market for needed funds.

As I have written many times in the past, the shale drillers are on a production treadmill. They must keep drilling at a frantic pace to offset the rapid decline of shale production. Production can decline 50% or more in the first year and another 75% in the second year before leveling out at a trickle compared to their initial flows. In an analysis of shale fields David Hughes found that shale wells are 70-90% depleted by year three and fields without new drilling decline at 20-40% per year after the first two years. ShaleBubble.org That means producers must recover their costs in the first two years and provide enough money to drill new wells to offset the rapid decline in last year's wells. The instant they stop drilling, production begins to decline sharply and cash flow along with it.

The Exxon CEO said last week that the majors are not going to bail out the minors as the shale bubble bursts. "There is not always alignment among buyers and sellers." This means the smaller companies are not being realistic in their pricing and without a real bargain, Exxon is not a buyer.


Last weekend I predicted a continued decline and there is nothing in the charts that suggests anything different this week. However, the market is oversold and there is likely a short squeeze lurking in the near future. It may be powered by a tweet saying Mexico has agreed to work on the migrant problem and the tariffs have been postponed. There is no telling what headline will appear to trigger that short squeeze.

Secondarily, the 2,750 level on the S&P is considered fair value. That suggests the selling pressure may ease. I am sure there are portfolio managers hoping for a dip to 2,632 as a major buying opportunity but we do not know if they have the guts to wait it out if a short squeeze appears. They may decide that 2,750 was also a bargain.

The challenge is that the Chinese trade dispute has morphed into a cold war only that war is heating up with China's white paper and enemies list being made public this weekend. This will undoubtedly have a major impact on the Sunday evening futures. There is always the possibility they are going to soft peddle the issues in an attempt to bring the US back to the table, but I would not hold my breath.

Investors must deal with the potential for the issues with China and Mexico to flare up even more. It is possible. We can't always expect that situations will fade into an eventual solution. They also need to deal with the impeachment cloud that is hovering over Washington. That means there is not going to be any legislation in the near future and Congress is hopelessly gridlocked. Normally the market does well with gridlock but we have never had such a vocal war between opposing sides.

Declines in May typically lead to rebounds in June followed by a slide into the summer doldrums. Summer rallies do occur, but they are the exception rather than the rule.

The key focus for next week will be the 2722-2737 support and resistance at 2,800. If the S&P continues lower and breaks that support, then 2625-2632 should be the next target. Any rebound is going to be challenged by prior support, now resistance at 2,800.

Unfortunately, the Dow has already closed below the corresponding support level at 25,000. Friday's decline blew through that level and appears to be targeting the 10% correction level at 24,145. The Dow closed at a four-month low and has a significant lack of material support. Only four Dow components posted gains for the month.

The Dow has declined 1,881 points since the cycle high on April 23rd. This is the longest losing streak since 2011.

The two Nasdaq indexes are suffering from the same pressures with closes under the 200-day averages. The big cap tech stocks are sick with the China flu and worries over social media regulation. News that the DOJ was preparing an antitrust probe against Google did not help the market. They just agreed to pay the EU $1.7 billion for breaking antitrust rules in advertising. They had a $2.7 billion fine in 2017 and a $5.1 billion charge against the Android operating system in 2018. Multiple lawmakers are on a crusade to breakup Facebook and Google so the DOJ news was troubling.

On Thursday a judge ordered Facebook to turn over data privacy records and detail how it handled user data. Shareholders have sued claiming board members may have committed wrongdoing in connection to data privacy. Facebook may not fare well if their internal content rules are exposed in a legal battle. Multiple lawmakers have called Facebook to task for been deleting accounts of conservative pundits by the hundreds for "rules violations" ahead of the 2020 elections. They will not say what the rules are or what rule was broken. Strangely liberal pundits are not censored and thousands of wackos continue to post unimpeded by any form of civility. Lawmakers have asked multiple times why only conservatives are deleted and receive only the standard answers that rules were broken. Rant off!

These challenges to Facebook and Google are causing those megacaps to lead the indexes lower. Add in Apple and you have nearly $2 trillion in market cap in just three stocks that are leading the tech sector lower.

The Russell 2000 has declined -7.9% since the May 3rd close. The small caps have been leading the markets lower and they could be on the verge of a serious support break that could see another 5% decline.

On Saturday the Mexican president hinted his country "could" tighten migration controls in order to eliminate the tariff threat on Mexican goods. Obrador said Mexico "could" be ready to step up measures to contain migration in order to reach a deal with the US. This was a repeat of comments on Friday afternoon. He said he expects "good results" from talks planned in Washington next week. With more than 4,000 migrants crossing the border daily it is going to be a challenge.

There will be a fight, but Trump's Art of the Deal strategy is to bluster big changes and threaten big penalties. He has been successful with everyone but China. Mexico is too dependent on the US to put up much resistance. How far the president will carry the fight is unknown, but he is passionate about the border crisis.

The market is likely to react to every headline but being oversold already means there may be less risk to the downside. Markets do not move straight up or straight down without a period to reset every few days. There is nothing in the charts or in the headlines to suggest a rally ahead other than the potential for a short squeeze. Follow the trend until it ends.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Running from the Law

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company is wanted in 44 states for collusion and price fixing. This is a major problem for Mylan as a lead defendant in a generic drug price fixing case. Shares could be headed for single digits.


No valid candidates. I scanned my entire list of stocks under $25 and there was not a single one that I would bet my money on. Nearly all the charts were bearish, but I hesitated to load up on shorts because the selloff is temporarily overdone and we could be looking at a tweet generated short squeeze at any time.


MYL - Mylan - Company Description

Mylan N.V., together with its subsidiaries, develops, licenses, manufactures, markets, and distributes generic, branded-generic, brand-name, and over-the-counter (OTC) pharmaceutical products in North America, Europe, and internationally. It offers active pharmaceutical ingredients and finished dosage forms; and antiretroviral medicines to treat HIV/AIDS. The company also provides prescription products, such as EpiPen Auto-Injector; Perforomist Inhalation Solution; Dymista; Creon; and Influvac, as well as YUPELRI, an inhalation solution for the maintenance treatment of patients with chronic obstructive pulmonary diseases. In addition, it markets OTC products, including Cold-EEZE, MidNite, Vivarin, Brufen, CB12, and EndWarts. The company offers its products to therapeutic areas, such as cardiovascular, CNS and anesthesia, dermatology, diabetes and metabolism, gastroenterology, immunology, infectious disease, oncology, respiratory and allergy, and women's health. Its customers include retail pharmacies, wholesalers and distributors, payers, and insurers and governments, as well as institutions, such as hospitals. Mylan N.V. has collaboration and license agreements with Pfizer Inc.; Momenta Pharmaceuticals, Inc.; TB Alliance; Theravance Biopharma, Inc.; Biocon Ltd.; and Fujifilm Kyowa Kirin Biologics Co. Ltd. The company was founded in 1961 and is headquartered in Canonsburg, Pennsylvania. Company description from FinViz.com.

Earnings August 6th.

Mylan won the distinction of being one of the five worst performing stocks of 2019. They are being sued by 44 states for collusion and price fixing on generic drugs. This is likely to be the biggest case of its kind ever. Teva and Mylan are two of the major defendants. Analysts believe Teva could be liable for more than $3 billion in damages and Mylan would see fines of $1.1 billion or more. That is more than 10% of Mylan's market cap.

They are already down hard on the news but are likely to go to single digits.

Sell short MYL shares, currently $16.80, stop loss $18.35.
Optional: Buy August $15 put, currently $1.02, stop loss $19.25.

In Play Updates and Reviews

Small Cap Rout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 has fallen more than 9.4% since the May 4th high at 1,618. The small cap sector continues to be the market leader. Friday's close was right on decent support at 1,465 but there is no confidence it will hold. The trade headlines are worsening as the days pass.

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

FLEX - Flex Inc
The short position was entered at the open on Tuesday.

BITA - BitAuto
The short position was closed at the open on Tuesday.

BULLISH Play Updates

F - Ford Motor Co - Company Profile


The announcement of tariffs on Mexico killed this position for good. However, this is a September call option. I am dropping it from the portfolio as a loss, but I would not sell it for the 13 cents. Miracles do happen. Just put it in the folder of lost dreams and maybe we will get lucky.

Original Trade Description: May 18th.

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.

Position 5/20:
Dropping: Long September $11 call @ 35 cents, currently .13, -.22 loss.

TRN - Trinity Industries - Company Profile


Trinity suffered the same fate as Ford. Tariffs on Mexico would be a serious hit to revenue on the railroads. They are not going to be adding new cars until the crisis is over and they could cancel orders already in progress.

The call has no value after the market crash on Friday. I am dropping it from the portfolio for a loss but I would not close the position.

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.

Position 5/6:
Dropping: Long July $23 call @ 55 cents, zero value, -.55 loss.

BEARISH Play Updates

BITA - BitAuto Holdings - Company Description


We exited this position at the open on Wednesday to avoid any positive earnings reaction.

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.

Position 5/13:
Closed 5/29: Short BITA shares @ $10.87, exit $10.22, +.65 gain.
Optional: Closed 5/29: Long July $10 Put @ 85 cents, exit .95, +.10 gain.

FLEX - Flex Ltd - Company Description


Flex priced $450 million of notes due 2029 and will use the proceeds plus available cash to redeem $500 million in notes due in 2020. Shares fell to a new 4-month low.

Original Trade Description: May 25th

Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It operates through High Reliability Solutions, Industrial and Emerging Industries, Communications & Enterprise Compute, and Consumer Technologies Group segments. The company operates Customer Engagement Centers, Innovation and Design Centers, and Centers of Excellence/Competence. It also provides a portfolio of technologies in electrical/electronics, electromechanical, and software; and cross-industry technologies, including human machine interface, audio and video, system in package, miniaturization, IoT platforms, and asset tracking. In addition, the company designs and integrates advanced data center servers, storage and networking equipment, and data center appliances. Further, it provides value-added design and engineering services; and systems assembly and manufacturing services that include enclosures, testing services, and materials procurement and inventory management services. Additionally, the company offers chargers for smartphones and tablets; adapters for notebooks and gaming systems; power supplies for the server, storage, and networking markets; isolated DC/DC converters and non-isolated Point of Load converters for the information and communications technology market; and specialized power module solutions for other markets. It also provides after-market and forward supply chain logistics services; and reverse logistics and repair solutions, including returns management, exchange programs, complex repair, asset recovery, recycling, and e-waste management. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.

Flex, formerly Flextronics, is struggling. In their recent earnings they reported 27 cents that matched estimates. Revenue declined -2.9% to $6.226 billion and missed estimates for $6.481 billion. They blamed sluggish demand from China, soft demand from networking customers and weakness in semiconductor capital equipment and energy verticals.

Revenue from the consumer technologies group declined -7% due to weakness in core consumer products. Revenues from industrial and emerging industries declined 8% because of weakness in semiconductor capital equipment. Revenue from high reliability solutions declined 4% due to weakness in medical equipment and automotive equipment. Health solutions rose 10% but could not offset the 12% decline in automotive.

They guided for Q2 for earnings of 25-29 cents which exactly bracketed estimates for 27 cents. For the full year they expect $1.20-$1.30 or $1.25 midpoint and analysts were expecting $1.26.

Earnings July 30th.

With the trade war and tariffs on Chinese goods, demand is going to decline even further. Shares have fallen below near term support and could be targeting $7.

Position 5/28:
Short FLEX shares @ $9.30, see portfolio graphic for stop loss.
Optional: Long October $9 put @ 81 cents, see portfolio graphic for stop loss.

MNK - Mallinckrodt Plc - Company Description


Piper Jaffray analyst David Amsellem downgraded the stock to neutral on Friday morning saying the developments last week had "blown his bull case to smithereens." This downgrade came a day after MNK reiterated its prior announcement of a spinoff of its generic drug business to shareholders.

MNK is under pressure for raising the price of a vial of Acthar from $1,650 in 2007 to $39,000. That progression included price hikes by Questcor before MNK bought the company in 2014. The drug has been profiled as the poster child of what is wrong in the pharma industry. The prior week Medicare/Medicaid took Acthar off the approved list and MNK sued CMMS over the decision.

Original Trade Description: May 18th

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.

Update 5/26: MNK filed suit against the Dept of Health and Medicare/Medicaid to keep its Acthar Gel in the system. The CMS recently required MNK to change the base date average manufacturer price used to calculate rebates. Without the suit, Acthar Gel would be removed from the system. That accounts for 10% of total sales. Prior guidance was $1 billion in sales for the drug and analysts now expect a $600 million charge for the decision.

Position 5/20:
Long July $14 put @ $1.75, see portfolio graphic for stop loss.

VXXB - Barclays VIX Futures ETN - ETN Description


Despite the major market decline the VXX only rose just over 2 points. Investors do not seem to be in panic mode.

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.

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