Option Investor

Daily Newsletter, Sunday, 6/9/2019

Table of Contents

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

Market Wrap

Fed to the Rescue

by Jim Brown

Click here to email Jim Brown

The Tuesday short squeeze on Powell comments changed sentiment significantly.

Weekly Statistics

Friday Statistics

After a -1,722 point decline in the prior five weeks the Dow rebounded back with a 1,300 point gain. The market exploded higher on comments that progress was being made in the Mexican tariff talks and comments from Fed members that they would be open to cutting rates to offset the impact of tariffs. The icing on the cake was another headline tease that China would welcome a resumption of the trade talks.

Obviously, none of these headlines developed into concrete developments but they boosted sentiment significantly on expectations of future events. The very oversold market rocketed higher from Mondays tech generated lows. Google (GOOGL) dropped 80 points at the open on Monday and Facebook declined 16 points to severely tank the tech sector. The Nasdaq Composite was down -160 points at the low. This tech washout fueled the giant short squeeze as investors rushed to grab some bargains in a FOMO rebound. The Nasdaq rebounded 475 points from Monday's low to Friday's high for a 6.5% gain.

The challenge is determining how much longer this rebound can run. The Dow is right back in its prior resistance range that has caused trouble since November. It would be foolish to expect the Nasdaq to simply continue higher after a 6% gain in four days. There needs to be a pause for profit taking. Over the same period the Russell 2000 has lagged with only a 3.5% gain. The Russell was leading us lower and will be the key to our future direction.

Fortunately, the standoff with Mexico was resolved and the market is poised to open higher on Monday. That could postpone profit taking for another day or two.

The potential for the Fed to hike rates rose even higher on Friday after the Nonfarm Payrolls missed estimates badly. Jobs for May rose by only 75,000 compared to the estimate for 190,000. In April the same report initially showed a 263,000 increase in jobs.

The April number was revised lower by 39,000 jobs to +224,000 and the March number was revised lower by 36,000 jobs to +153,000.

I believe the tax cut pixie dust has faded and the chart seems to show that jobs peaked in January with the +312,000 reading. The last four months have been significantly weaker with a drop to 56,000 in February.

At the time analysts were saying there was a timing error in survey that pumped up January and by drawing jobs out of February. It is possible that same error exists in the April/May survey but overall the moving average is moving lower. Analysts pointed out that the normal survey week fell later in the month. It was also impacted by the severe flooding in the Midwest. The June numbers should rise because of recent graduates moving into the workforce.

For now, the unemployment rates remained at 3.6% and a 50-year low. The labor participation rate was flat at 62.8%. The broader U6 employment fell to 7.1% and the lowest since the financial crisis. Average hourly earnings increased 0.22% and slightly higher than the recent average gains.

Weighing on the numbers was the closure of the Payless shoe store chain and continued store closures by other retailers. Providing a lift for June will be the hiring for the census. That will be a positive for months to come with more than 500,000 workers hired.

The miss in employment expectations along with the various tariff headlines caused the yield on the ten-year to fall to 2.05% and a two-year low. The low in September 2017 was 2.034% and a decline below that would take us back to November 2016 and the day before the election. Bank of America said inflows to bond funds last week were the highest since February 2015.

All the worries about a global economic slowdown has caused a sharp rally into treasuries and that rally may not be over. Multiple fed heads said last week they are open to cutting rates to offset the problems caused by tariffs. Analysts are now expecting a rate cut in July. The Fed funds futures are indicating only a 1.1% chance of making it to January without a rate cut. That means there is a 98.9% chance of at least one cut.

Currently there is an 81% chance of a cut in July, 66% chance of a second cut in September and a 61% chance of a third cut in December. Clearly, that is the extreme view since each cut will diminish the chance of future cuts but that is what the numbers show today.

The CME pointed out that open interest on Fed funds futures contracts had risen 469% since 2013. Volume has risen 39% since the same period in 2013. CME's global nearly 24-hour network ensures liquidity so investors/traders can enter and exit instantly at any time. Open interest across all rate contracts has surpassed more than 102 million contracts. Those futures have been given a workout over the last several weeks with daily headline driven trade causing extreme volume.

The headline volatility also tanked the dollar. The Dollar Index fell -1.6% over the last week to a two-month low. The tariff troubles are hitting the US economy on all fronts. This will be a plus for S&P companies doing business overseas, but it will not compensate for the tariff hits.

The economic calendar is light for next week and the normally active Fed speakers have entered their quiet period before the FOMC meeting the following week.

The consumer and producer price indexes will be the most important reports for the week. If they were to suddenly show an increase in inflation, it could put the Fed back on hold and the expected rate cuts could disappear. The market could be volatile around these reports.

There are only a couple big name companies reporting earnings next week. The calendar is sparse. Lululemon and Broadcom are the only heavyweights. We have reached the end of the Q1 cycle and it is only a couple weeks before the early reporters begin the Q2 cycle.

Of the 495 S&P companies that have reported, 75.6% beat earnings with an average gain of +1.6% compared to the 16.9% growth rate in Q4. Revenue has risen 5.6% with 56.9% beating estimates. There have been 76 negative guidance warnings with 21 companies issuing positive guidance. Only two S&P companies report this week.

Last week was a slow week for earnings as well. Salesforce.com (CRM) was a highlight with earnings of 93 cents that beat estimates for 61 cents. Revenue of $3.74 billion beat estimates for $3.69 billion. While the earnings were good the best news was raised guidance that erased fears from the prior two quarters of a growth slowdown. The CEO said they were still on path to double their annual revenue to $26-$28 billion over the next four years. For Q2 they guided for earnings of 46-47 cents on revenue of $3.94-$3.95 billion. For the full year they raised guidance to $2.88-$2.90 on revenue of $16.10-$16.25 billion. Analysts were expecting 65 cents on $3.94 billion for Q2 and $2.56 on $16.14 billion for the year. The Q2 earnings guidance miss for Q2 did not impact the stock price and shares rebounded from Tuesday's low of $141.50 to close at $161.27 on Friday.

Beyond Meat (BYND) continued its rocket ride after revenue rose 215% to $40.2 million and beating estimates for $38.9 million. They posted an adjusted loss of 14 cents that was slightly better than the 15 cent loss analysts expected. They raised their full year revenue guidance to $210 million, a 140% increase, and beat estimates for $204.9 million. The company qualified that raised guidance saying it did not include numbers for any deals that have not been signed or deals that are still in trials. Multiple large chain restaurants have been in trials in April and May and those trials should result in nationwide delivery contracts and millions of meals being served. The company also said they could reach breakeven on earnings by the end of 2019. Barclays said the "alternative to meat" market could reach $140 billion in annual sales. Beyond has a big head start in this race to capture market share. The stock gained $39 on Friday. Shorts, thinking the earnings would disappoint, were squeezed once again.

Ciena Corp (CIEN) exploded higher after reporting earnings of 48 cents that beat estimates for 41 cents. Revenue rose 18.5% to $865 million and beat estimates for $819 million. The company saw 17.8% growth in networking platform revenue to $697 million. The company guided for annual revenue growth of 13-14% and well above their prior guidance for 6-8%. The CEO said some customers are shifting business away from smaller companies and Ciena is the market leader, ahead of Huawei and Nokia. With the push to blacklist Huawei, Ciena's prospects are only going to improve. They expect to gain 2-3% or more in market share for the rest of 2019. The CEO said Ciena has "virtually no revenue exposure to China." "We like to compete on the basis of merit and that is not how the market works there."

Another recent IPO, Zoom Video Communications (ZM), surged after reporting earnings of 3 cents that beat estimates for a penny. Revenue rose 103% to $122 million and beating expectations for $111.7 million. They guided for Q2 for revenue of $129-$130 million compared to estimates for $121 million. Zoom is one of the few profitable companies to go public in 2019. This year has been reminiscent of 2000 when companies with no forecast of ever being profitable were going public at astronomical prices. Most of those companies no longer exist.

Bernstein said Zoom's total addressable market could rise to $43 billion in two years giving them plenty of room to grow and take market share.

Gamestop (GME) is the prime example of technological obsolesce. After rising to operate 5,800 stores across 14 countries it is rapidly disintegrating. The company posted earnings of 7 cents that beat estimates for a loss of 3 cents but that was the only highlight. Revenue fell from $1.79 billion to $1.55 billion and analysts were expecting $1.64 billion.

The company guided for full year revenue to decline between 5-10% and halted its dividend. With the stock decline the yield was up around 20% and they had plenty of cash but the business is crumbling. The challenge is the recent move to online games rather than physical games that can be resold. Their business model is going the way of Blockbuster. Netflix and streaming put Blockbuster out of business. The move to online games by Microsoft, Google and others will eventually put Gamestop out of business. The company cannot support 5,800 stores without new physical games to sell. As time passes the gamers will grow tired of replaying all the existing games and reluctantly move on to the online environment. With online games you can play the same game on your smart TV, PC, tablet or even your phone so you can play wherever you are and not just in front of your TV with a game console.

After the bell we learned that Uber's (UBER) chief marketing officer (CMO) Rebecca Messina and COO Barney Harford were both leaving the company. Shares declined sharply on the news. It is bad for sentiment when two C-suite executives flee the ship immediately after the IPO.

After years of saying Amazon is a valuable partner for FedEx, the company finally pulled the plug and cancelled their ground shipping contract with the retail giant. FedEx made the decision not to renew its FedEx Express contract in order to "focus on the broader e-commerce market." This does not currently impact any of the other contracts they have with Amazon, but the path is clear. In 2018 the FedEx Express contract only accounted for 1.3% of FedEx total revenue. FedEx Express is a 3-day ground delivery option. With Amazon now delivering more than 100 million products overnight, the 3-day express option was more than likely declining in use.

The FedEx CEO said daily e-commerce deliveries are set to grow from the current 50 million packages per day to more than 100 million by 2026. I would like to know how he came up with that statistic.

The CEO said FedEx has the network and capacity to serve thousands of retailers in the e-commerce space. What they did not say was that Amazon's constant pressure to reduce costs was causing FedEx to lose money on the service. Amazon is rapidly ramping up its fleet of 737 and 767 freight aircraft, now at 50, and expected to grow. They are building a $1.5 billion air cargo hub in Kentucky to handle their fleet. The company is also adding thousands of delivery partners in cities across the US. Amazon is rapidly duplicating the UPS/FDX portion of their network. It is clear that Amazon is eventually going to be delivering the bulk of their own packages to cut the cost of the last mile and be more in control of their delivery times. Amazon thanked FedEx for being a valued partner but said nothing else.

Over the weekend we learned that United Technologies (UTX) and Raytheon (RTN) have agreed to an all stock merger of equals to create a $74 billion company. Raytheon shareholders will receive 2.3348 shares in the combined company for each Raytheon share they own. The merger is expected to produce $1 billion in cost synergies by the end of the fourth year. United Technologies shareholders will own about 57% of the combined companies. The deal is expected to close in early 2020 after United completes the spinoff of the Carrier air conditioning and Otis elevator businesses. United supplies communications gear for commercial aircraft and Raytheon supplies aviation equipment to government contractors for military aircraft and missiles.

It was a bad week for energy prices. Fears of a global slowdown along with worries about a rebound in supply caused WTI prices to fall to $50.60 on Wednesday. Russia's energy minister said the country would increase production at the end of June. Russian production had declined below agreed levels after the sabotage of more than 20 million barrels of Russian crude with a corrosive chemical. That has been cleaned up and normal production has resumed.

Prices rebounded somewhat after the Saudi Oil minister said OPEC would prevent excess production from pushing prices lower. The Saudi energy minister said OPEC was close to a deal to extend the production cuts at the June meeting. The agreement is keeping 1.2 mmbpd off the market. The OPEC production meeting is on June 25-26th.

US inventories rose unexpectedly by 6.8 million barrels after a 7 million barrel spike in imports for the week. The 7.93 million bpd import rate was the highest in months. US production rose to a new high at 12.4 mmbpd.

The falling oil prices caused an 11-rig drop in active oil rigs and as prices close in on $50 it is only going to get worse. Many companies that are marginally profitable or at least surviving with prices over $50 will begin to struggle under that level. They will not be spending millions on drilling new wells or at least they will only be drilling in their most prolific areas where they already have production infrastructure.

I caught some flack about my comments on rapid shale depletion in the prior newsletter. The following statistics prove my claim. There are currently 446 rigs drilling for oil in the Permian Basin. Each rig completes between 2 and 3 wells per month. Using the low number that means there are roughly 892 wells completed per month. According to the EIA production from the Permian has only risen 56,000 bpd since the same period in May. Completing that many wells should cause a significant increase in production unless the gains are being offset by depletion in the 18,480 horizontal wells that already exist. Those are new wells drilled since 2008.

This is another killer statistic. Some 60% of Permian production comes from wells that are less than 18 months old. Source The other 15,000 wells only contribute 40%. The instant prices decline to the point where it becomes unprofitable to drill in the Permian, production will crash almost immediately.

There is one qualification. Many of the new wells do not have infrastructure to move the oil to market. Once the various pipelines are completed over the next 18 months, many of those wells will become producers. There are 3,964 drilled but uncompleted wells in the Permian and waiting for pipeline access and/or higher oil prices to justify spending millions to complete them.


On Tuesday Chairman Powell rescued the markets from an ugly slide but it only takes a day or two for investors to price in the headlines. With investors already expecting a cut in July, September and December, the Fed is more than likely going to try and reign in some of these expectations in the statement after the FOMC meeting on the 19th. That will tone down some of the excitement. While the Fed is a powerful force in the market it is the headlines that move the indexes not the long-term expectations. We could be reaching the end of that headline euphoria.

Hedgeye Cartoon

The market is currently climbing a formidable wall of worry. The trade war with China has serious economic implications if President Trump and President Xi do not have a successful meeting at the G20 in Japan at the end of the month. Trump is said to be considering additional tariffs on $300 billion in Chinese goods.

The tariffs are hurting China. According to Wells Fargo, Chinese diesel fuel demand, an indicator of business activity, declined 14% in March and 19% in April. This is a significant drop and suggests a sharp decline in economic activity. This is used to fuel trucks that move goods. Wells Fargo believes this is related to the trade war uncertainty and tariffs. Diesel demand has declined to post 2008 levels. If China continues to slow dramatically the rest of Asia will also slow and we could be facing an Asian recession.

Other factors in the wall of worry include recession worries and slowing growth in the US, falling yields, earnings in low single digits, antitrust worries in mega cap techs and geopolitics in general. They say markets like to climb a wall of worry and we have one today.

Fortunately, the agreement with Mexico took a major roadblock out of our way. Analysts said the proposed tariffs on Mexican goods would have been significantly more damaging than the Chinese tariffs.

The S&P rebounded to resistance from January at 2,872 and should surge over that level on Monday thanks to the Mexican agreement. Futures are up +16 as I type this. The index is back over all the major averages and poised to move back above 2,900.

If the S&P is successful in moving over 2,900 we could see the new high target begin to exert its pull once again. That would be a close over 2,945. Tom Lee said on Friday that investors should quit worrying about this short-term volatility and think long-term. He is maintaining a 3,100 target for the end of 2019.

The Dow never made a new high back in April. The prior high was 26,828 back in October and the April high close was 26,656. The Dow is handicapped by several stocks with exposure to China and falling interest rates. Apple was also a major drag. The Dow needs positive economic sentiment to make a new high and that sentiment is falling in the US as evidenced by the Fed's willingness to consider rate cuts.

The Nasdaq exploded through the 7,645 resistance level on Friday as the big cap techs reversed their early week decline. That should now be support. Multiple analysts were putting out buy recommendations on Facebook and Google saying the worry was overdone and the actual fines would be less than expected. Apple and Facebook powered higher, each with $5 gains.

The next resistance is 7,840 followed by 7,925. The early May high was 8,164 and not likely to be retested soon. The Nasdaq gained 4% for the week but that was after a 2% decline on Monday so a 6% rebound overall. There should be profit taking in our future.

The Russell posted a solid rebound from the 1,463 level but it remains lackluster compared to the other indexes. The small caps have a long way to go to punch through the 1,600 level again and even longer run to the new high levels at 1,740. This could be our Achilles Heel.

It appears we are going to open positive on Monday thanks to the elimination of the Mexican tariffs. However, given the strength of the rebound last week we should be expecting a pause to reset at some point. Just as the markets were oversold, they are now short-term overbought, and those pressures need to equalize. I am neither positive or negative on the market for the week but without some positive economics and movement on the China talks, the longer-term path of least resistance is still down. The wall of worry can still be climbed but we are only one tweet or headline away from a profit taking event. Who would have thought the prior week that a tweet would appear calling for tariffs on Mexico only three days after the USMCA had been fast tracked? I would avoid being overly long until after the June 29th G20 meeting with President Xi.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Hot and Not

by Jim Brown

Click here to email Jim Brown
Editor's Note

One of these stock is rising on better earnings, one is not. Changyou just paid a special dividend of $9.40 or half its share price. Shares are rising on raised earnings guidance. ASPS is falling from lack of investor interest in a complicated business structure headquartered out of the US.


CYOU - Changyou.com Ltd - Company Profile

Changyou.com Limited develops and operates online games in the People's Republic of China. The company operates through Online Game, Platform Channel, and Cinema Advertising segments. It develops, operates, and licenses online games, including interactive online games that are accessed and played simultaneously by various game players through personal computers; and mobile games played on mobile devices. The company also operates 17173.com Website, an information portal that provides news, electronic forums, online videos, and other information services on online games to game players; and offers various software applications for PCs and mobile devices, as well as purchases pre-film cinema advertising slots from movie theater operators for advertisers. As of December 31, 2018, it had approximately 4.9 million total average monthly active accounts; and 1.6 million total active paying accounts. The company was founded in 2003 and is headquartered in Beijing, the People's Republic of China. Changyou.com Limited is a subsidiary of Sohu.com Limited. Company description from FinViz.com.

Changyou reported earnings of 69 cents, up from 30 cent in the year ago quarter. Revenue of $123 million and beat estimates for $115.85 million. They guided for Q2 for revenue of $110-$120 million and earnings between 41-50 cents. Analysts were expecting $106.8 million and 46 cents.

The company also announced a special dividend of $9.40 that was paid on June 3rd. As is customary the price of the stock was reduced by the $9 paid in the dividend. Shares held at $9 for several days before moving higher.

With rising earnings and the special dividend behind them, the stock should continue to rise to its prior level.

Earnings July 29th.

Buy CYOU shares, currently $10.43, stop $9.43.
Optional: Buy July $11 call, currently 55 cents. No initial stop loss.


ASPS - Altisource Portfolio Solutions - Company Description

Altisource Portfolio Solutions S.A. operates as an integrated service provider and marketplace for the real estate and mortgage industries in the United States and internationally. It operates in two segments, Mortgage Market and Real Estate Market. The company offers property preservation and inspection, real estate brokerage and auction, title insurance and settlement, appraisal management, broker and non-broker valuation, foreclosure trustee, mortgage charge-off collection, residential and commercial loan disbursement processing, and residential and commercial construction inspection and risk mitigation services, as well as valuation data; residential and commercial loan servicing, vendor management, marketplace transaction and payment management, and default services technologies; and document management platform. It also provides fulfillment, loan certification, and mortgage banker cooperative management services; loan origination system; loan certification and mortgage fraud insurance; and vendor management oversight platform. In addition, the company offers mortgage brokerage and homeowners insurance solutions; and buy-renovate-lease-sell and data solutions, as well as real estate brokerage services under the Owners.com name. Further, it provides post-charge-off consumer debt collection services, customer relationship management services, and information technology infrastructure management services. The company serves financial institutions, government-sponsored enterprises, utility companies, commercial banks, servicers, investors, non-bank originators, correspondent lenders, mortgage bankers, insurance companies, and financial services companies. Altisource Portfolio Solutions S.A. was incorporated in 1999 and is headquartered in Luxembourg City, Luxembourg. Company description from FinViz.com.

Earnings July 25th.

Altisource is an uninspiring company. Their earnings read like a list of excuses by a 4th grader on why they don't have their homework. Revenue is falling and they are selling off multiple divisions where their business plan failed to produce results.

In the US they might be forgiven for a few bad decisions, but they are located in Luxembourg. That effectively takes them out of the normal reporting and recourse solutions. They may be a good company but their list of excuses is causing investors to lose interest.

With revenue in Q1 of $165 million and earnings of only $200,000, there is little room for error. The adjusted earnings have more notes than what should be legal.

They have sold their property management business. They are selling their buy-renovate-lease-sell business. They are selling their financial services business. The proceeds will be used to reduce debt. The key point here is that investors are losing interest. Shares closed at a new low on Friday.

Sell short ASPS shares, currently $19.00, stop loss $20.50.
Options are thinly traded and premiums not realistic.

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

In Play Updates and Reviews

Trailing Indicator

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell rebounded 3.5% but trailed the big cap indexes. The small caps led us lower since May 1st and then lagged on the rebound. This could be the ongoing challenge in the weeks ahead. The small caps are supposed to lead in both directions and their relative weakness suggests the market has not healed. Only a few big caps are leading the charge higher and that is a worrisome sign.

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

MYL - Mylan
The short position was entered at the open on Monday.

FLEX - Flex Inc
The short stock position was stopped at $9.45.

MNK - Mallinckrodt
The long put position was stopped at $9.65.

BULLISH Play Updates

No Current Longs

BEARISH Play Updates

FLEX - Flex Ltd - Company Description


Flex shares rebounded with the market to stop us out of the short stock position.

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:
Closed 6/4: Short FLEX shares @ $9.30, exit $9.45, -.15 loss.
Optional: Long October $9 put @ 81 cents, see portfolio graphic for stop loss.

MNK - Mallinckrodt Plc - Company Description


Despite all the bad news MNK was caught up in the market short squeeze and we were stopped out of a very successful position.

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.

Update 5/31: 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.

Position 5/20:
Closed 6/4: Long July $14 put @ $1.75, exit $4.50, +$2.75 gain.

MYL - Mylan - Company Description


Union pension fund adviser CtW Investment Group urged Mylan shareholders to vote against the company's four director nominees, who are on the boards nominating and governance committee. CtW said these four had operates with a "serious disregard for the rights of Mylan shareholders." Shares are bleeding slowly lower after Tuesday's minor bounce to $18.

Original Trade Description: May 31st

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.

Position 6/3:
Short MYL shares @ $16.91, see portfolio graphic for stop loss.
Optional: Long August $15 put @ $.98, see portfolio graphic for stop loss.

VXXB - Barclays VIX Futures ETN - ETN Description


Shares back down to 28 and could drop significantly now that the Mexican standoff is over.

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.