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Daily Newsletter, Sunday, 6/16/2019

Table of Contents

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

Market Wrap

Rate Wait

by Jim Brown

Click here to email Jim Brown

The market is patiently waiting for the Fed rate announcement on Wednesday.

Weekly Statistics

Friday Statistics

Investors waiting for an actual rate cut could be waiting for a while. Despite the futures showing three cuts likely for 2019, the Fed will most likely wait until after the G20 meeting to see if there is any progress on the Chinese trade agreement. If there was a breakthrough at the meeting, there would be no need for a rate cut because the global economy and the markets would begin to rise again. If there is no agreement it is likely headlines could worsen with additional tariffs and a rate cut would then be justified.

Trump had warned that he would raise tariffs on $300 billion in additional Chinese goods if President Xi did not show up at the G20 and schedule a meeting with him. As I wrote last week that put pressure on Xi not to show up because coming to the meeting would look like he was acquiescing to Trump. That would be seen as a loss of face in China and a reason why he could stay home.

Late in the week, President Trump, changed his tune saying it would not make any difference if Xi showed up on not, the negotiations would continue and eventually we would have a deal. That was a complete turnaround and clearly somebody pointed out the implications of his prior warning.

As of Saturday, there was no word on whether Xi would attend or whether there would be a meeting if he did attend.

President Trump's time is running short. It could take months to conclude a deal with China and the trade war is weighing on the US economy. Trump will want to run on the strength of the economy in 2020 and that means he has to conclude a deal with China ASAP so the economic pressure eases. This is the primary reason we are likely to see a deal over the next couple of months. The longer the war drags on he is likely to grasp at anything that is offered and claim a big win just to put the problem behind him. If he wins reelection, he can restart the negotiations with nothing to lose and everything to gain. China is well aware of the US election cycle and that probably factored into their recent walk away from the talks. They know the longer they drag it out the better chance of a favorable outcome.

After five days of strong gains the Dow remained stuck in a consolidation range for the entire week while we wait on the Fed. The Nasdaq had rebounded 8.5% from the June 3rd lows and spent the entire week in consolidation but support at 7,775 held.



Friday had a flurry of good economic news that would suggest continued patience by the Fed. The retail sales for May came in with a 0.5% gain but there was good news from April. The previously reported -0.2% decline was revised to a +0.3% rise and a whopping 2.8% gain for the last three months. March was revised higher from a 1.7% rise to 1.8% gain.

May gains were led by a 1.1% rise in electronics and appliances and a 1.1% gain in sporting goods and hobbies. Non-store retailers posted a 1.4% rise. Motor vehicles and parts, general merchandisers and food service all posted a 0.7% gain. Food and beverages were the only loser with a -0.1% decline. Core sales, excluding food and energy, rose 3.2% over the last 12 months.

Analysts had expected weaker sales because of the impact from the floods in the Midwest. However, the storms in the South may have offset the losses elsewhere. The flaw in that theory was only a 0.1% rise in building products. Since we know there has been a surge in rebuilding in the South, that probably offset the lack of sales in the areas that are still flooded in the Midwest.

Industrial production for May surged 0.4% and easily beating the 0.1% estimates and -0.5% decline in April. Unfortunately, below average temperatures in May caused a spike in utility production of 2.1% and invalidated the supposedly good data. On the plus side motor vehicles and parts rose 2.4%. High tech production rose 0.4% and manufacturing managed only a 0.2% gain. This report was ignored. I continue to believe utilities should not be included in this data.

Business inventories for April rose 0.5% and matched estimates after posting a flat reading for March. This was a three-month high after a 0.85% rise in January. Manufacturing inventories rose 0.26%, retail inventories 0.53% and wholesale inventories rose 0.82%. Motor vehicles and parts dealers inventories rose 0.8% after a -0.6% decline in March.

Consumer sentiment for June declined from 100.0 to 97.9. The present conditions component rose from 110.0 to 112.5 but the expectations component declined from 93.5 to 88.6. Five-year inflation expectations declined from 2.6% to 2.2% and the lowest on record. Some 40% of respondents commented on the tariffs as a reason for their falling sentiment. That is up from 21% in May.


The Atlanta Fed real time GDPNow forecast for Q2 spiked from 1.5% to 2.1% growth based on Friday's economic reports. That should be good news but with everyone expecting a string of rate cuts, it could actually be bad news. The White House NEC head was on CNBC saying they expected 3+% growth for the rest of the year. If that is the case, then why would the Fed want to cut rates. Clearly, it is only because of the tariff implications. However, if the economics continue to improve then we are missing real evidence of a tariff drag and the Fed will be reluctant to cut. Since the market priced in the three cuts the prior week with the 8% gain, that suggests the Fed guidance on Wednesday is going to be very important.


There is a 99.3% chance of rate cuts by year end. One is almost assured depending on the G20 outcome. Two are more than likely but three would be evidence of an economic disaster. With each cut the potential for future cuts declines and that should eliminate the third cut option after September. Currently the futures are suggesting a cut in July and another in September. If this outlook changes it would be market negative.


The important reports for next week are the three housing reports and the Philly Fed survey. However, the market will focus on the FOMC announcement more than anything else. Powell's press conferences have been direct and to the point. He will be interrogated by the press so there is the potential for a foot in mouth event. If he says anything that sounds like "data dependent" or "open to rate adjustments later in the year" the market is going to choke. His comments two weeks ago prompted the 8% rebound. If he tries to walk back those comments, we could see another decline.

Hedgeye Cartoon


Only four S&P companies have not reported earnings for Q1. The final forecast is for 1.6% earnings growth. That is up from an expected 2% decline earlier in the cycle. Revenue rose 5.6% with 57% of companies beating estimates. There have been 77 guidance warnings and 22 guidance upgrades.

The highlights for this coming week are Adobe, Oracle and Red Hat. Jabil, La Z Boy, Kroger, Darden Restaurants, Winnebago, Carmax and Canopy Growth round out the field.


The one earnings report that tanked the market on Friday was Broadcom (AVGO). CEO Hock Tan said, "We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers. As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year." He was referring to Huawei which bought $900 million in chips from Broadcom in 2018.

They cut their full year revenue guidance by $2 billion to $22.5 billion. They reported earnings of $5.21 that beat the estimates by 3 cents. Revenue of $5.5 billion missed estimates for $5.69 billion.

The problem is that all the chipmakers feed off each other. Everyone makes chips that fit into devices made by others. With Huawei on the endangered species list, all of those parts to go into the various devices made by Huawei are now oversupplied and it is not like there are a dozen other companies just waiting to buy those specialty parts.


The decline in the chip sector had knocked about 3% off the Semiconductor Index. The $SOX had rebounded 33% from the December lows, fell 17% from the April highs as Chinese tariffs increased and was rebounding again until the earnings guidance this week. Broadcom's news was just the punctuation on the declines of the last several days as tariff worries increased. The warning by the largest supplier of the group was the death knell for the rebound.


Lululemon (LULU) reported earnings of 74 cents that beat estimates for 70 cents. That was up from 55 cents in the year ago quarter. Revenue rose 20% to $782.3 million and beat estimates for $756.1 million. Same store sales growth rocketed 14% and easily beat expectations for 11%. On the conference call they said they saw growth in all areas but a 26% increase in its men's business was a highlight. E-commerce sales rose 35% and sales in China rose 70%.

They raised guidance from $4.48-$4.55 to $4.51-$4.58 for the full year. They raised the revenue guidance from $3.70-$3.74 billion to $3.73-$3.77 billion. This was a killer report and 21 of the 34 analysts that cover the company raised their price targets. The new average price target is now $191.71 and represents a 10.2% rise.


In a major change of direction, Duluth Holdings (DLTH) reported a loss of 23 cents compared to estimates for 22 cents. Revenue of $114.244 million rose 14% and narrowly beat estimates for $114.07 million. That was their 37th consecutive quarter of revenue growth. Shares traded higher by 5% on the news. Unfortunately, the gain was short lived. Shares collapsed more than 10% on Friday.

The gain in revenue came from new store openings and not organic growth of existing stores. The 23-cent loss was 21 cents more than the 2-cent loss in the year ago quarter. These results compare to a profit of 64 cents in Q4. While revenue may be rising, earnings are not, and the shares were hammered.


Beyond Meat (BYND) was downgraded by JP Morgan on Tuesday and shares fell hard. The decline was brief, and the rally resumed almost immediately. On Friday shares spiked 12% intraday on news that their competitor Impossible Foods was having trouble meeting demand at White Castle and Red Robin. Impossible is working with Burger King on a possible nationwide release and this is sucking up all available product. This is actually good news for both companies. Rising demand in new markets and restaurant chains shows the consumer has accepted this meat substitute.

I was in a National Grocers (NGVC) on Saturday. The Beyond Meet burgers were sold out and there were six shoppers standing by the empty shelf talking about what they were going to substitute. I was also planning on buying some for my own taste test, so I asked the group if they had tasted them yet. Four of the six had eaten them before and were buying again and the other two were first timers like me. I live in the mountains 60 miles outside Denver and not a geography where you would expect fake meat to be flying off the shelves. Given the cost at roughly $3.25 per patty they better be really good, or I will not be buying them again.


The world's largest airplane is for sale for $400 million. It has only flown once. The plane was designed by the late billionaire Paul Allen, of Microsoft fame. The idea was to ferry rockets to high altitudes and then launch them into space. By using the Stratolaunch ferry the stress on the rocket would be less and it would require less fuel to reach space. This eliminates the need for launch towers and all the ground-based support facilities.

Initially, Stratolaunch was going to launch its own custom designed rockets but that idea died with the company approaching SpaceX, Blue Origin and others about launching their rockets. They currently have a contract to launch one rocket for Northrup in 2020 and contracts with Orbital ATK. The plane has a 385 ft wingspan and uses six Boeing 747 engines.

Richard Branson is said to be interested but he wants a big discount. You can't just buy the plane. You have to buy all the support facilities and staff to make it work. Therefore, the purchase comes with a hefty monthly expense. A buyer would need deep pockets to keep this company going. Branson has reportedly offered them $1. Branson offered British Airways $8.30 to buy the Concordes and continue flying them rather than scrap the fleet. British Airways declined the offer.


Corn futures hit a five-year high as flooding in the Midwest caused delays in planting. The Department of Agriculture revised corn production estimates to a four-year low. Rain is still falling, and the long-term forecast is for additional weeks of rain. Not only are fields impassable but grain storage bins, processing facilities and railroad access is underwater. Corn rose to $4.5325 per bushel on Friday. As of Friday, only 83% of the expected 2019 crop had been planted compared to the five-year average for 99% at this point in the season. Only 60% of the expected soybean crop has been planted compared to the 88% average for this week.


Blue Apron (APRN) surprised investors on Thursday after the close when it announced a 1 for 15 reverse split. The split was effective after the close on Friday. Shares fell 16% after the announcement. Prior to the split there were 100 million Class A shares outstanding. There will only be just over 6.7 million shares on Monday. The 96.4 million Class B shares will be reduced to 6.4 million.

Normally a reverse split is a last gasp attempt at rescuing the stock. However, by inflating the stock price back over $5 it opens them up for shorting once again. The company said its paying customers had declined -30% from last year and 50% down from two years ago. The company had received a delisting notice because the stock was under $1 for a period of 30 days.

I am sure you have noticed the absence of meal kit ads on radio and TV in recent weeks. The fad has burned out and participation is falling. People have decided they don't want to spend $25 a person for an ice chest of raw food and then spend 30-45 minutes preparing it only to end up with a mediocre meal. Most working consumers can't cook fancy food and stay at home moms have too many people to feed to justify the expense. Most people who can afford to spend $25 a plate for a meal want it to be served at a nice restaurant with a glass of wine. I am sure these types of services will linger for some time but the declining trend at Blue Apron is being repeated all across the space.

Meanwhile, privately held Sun Basket closed another round of funding with a $30 million investment. That brings their total up to $125 million. This company has a niche. They offer curated means that are paleo, vegan, vegetarian and others. These are meals you can't just run down to the local restaurant and order. They are only targeting the 100 million consumers who are primarily well off millennials and want healthy food. Therefore, Sun Basket can charge more for their meals and potentially make a profit. They have grown at a compounded growth rate of 80% over the last three years.


Crude prices spiked only slightly after two more tankers were attacked in the Persian Gulf. In prior years having six tankers attacked over a period of several weeks would have sent crude prices over $100. However, the current market is so over supplied there was only a minor blip.

With Venezuela practically out of the oil business and Iran only able to export a portion of their production you would think the excess production would have been eliminated. That is not the case and OPEC is struggling to even schedule a production meeting for the end of next week. Multiple countries are not currently planning on attending and the group cannot even settle on a date even though late next week was slotted on the calendar.

Russia is making noises about resuming production and leaving the OPEC+ group that has held 1.2 mmbpd off the market for a year. Saudi Arabia is promising to prevent another inventory glut, but the facts are not in their favor.

The IEA cut its forecast for global demand growth for the second consecutive month. The June report predicts 1.2 mmbpd growth for 2019 compared to 1.3 mmbpd in May and 1.4 mmbpd in April. They are basing their forecast on the rapidly slowing global growth, specifically in China.

In Q1 oil demand in the OECD declined 600,000 bpd year over year but rose in non-OECD countries by 850,000 bpd. World trade growth has declined to its lowest level since the financial crisis.

With a resolution in China trade discussions they expect demand growth to return to 1.4 mmbpd in 2020. At the same time US production is expected to rise 1.3 mmbpd and non-OPEC supply growth is expected to rise 2.3 mmbpd.

Refinery utilization finally spiked to the high for the year ahead of the July 4th holiday driving season. This should produce a significant decline in inventories for next week.





Markets

The markets slipped into a holding pattern ahead of the FOMC meeting on Wednesday. Investors do not expect a rate cut but they are afraid Powell will try to walk back his prior comments that juiced the market two weeks ago. That worry is likely to keep the gains muted until after the press conference. Normally the Tuesday before an announcement is positive regardless of what rate news is expected. This could be one of those Tuesday's where negative expectations keep everyone on the sidelines.

The Chinese trade headlines are likely to increase as we move closer to the G20 meeting. If the White House was smart, they would be quiet and not let the tweets get in the way of a deal. It is impossible to tell how the press and the Chinese will respond to any sporadic tweet. Sometimes positive tweets can be interpreted incorrectly depending on the bias of the reader. It would be best for a quiet period, but I doubt that will happen.

The S&P managed to close over 2,872 but the index could not push over 2,900. The 50-day at 2,873 is now support along with that prior resistance. The 2,945 level is the prior high and the target for any sustained move higher.


The Dow resistance at 26,191 was rock solid and the index held its gains while it consolidated. The Dow is poised to catapult over that resistance on positive Fed news. The overbought pressures have been relieved. Home Depot has been shooting up like a SpaceX rocket for the last two weeks and added more than 20 Dow points on Friday. McDonalds is making new highs on no news. United Technology is recovering from the post announcement decline but it has a way to go. Walmart and Merck are also making new highs. This is a case of the haves and have nots offsetting each other in the index and keeping it from posting gains. The 26,191 level is the one to watch.



The Nasdaq is still suffering from the FANG stocks. However, Facebook pulled out of the crowd on Friday to lead the big cap gains. There was some discussion in the press whether Zuckerberg knew about the privacy issues before it happened and that prompted another round of analyst discussion.

Current resistance is 7,857 followed by 7,900. Support is holding around 7,775. The chip wreck was a major drag on the tech sector on Friday.

AVGO, CSCO and APPL each erased 5.8 Nasdaq points on Friday with TXN and INTC erasing 3.4 and 2.1 points respectively.




The Russell rebounded on Thursday but gave it back on Friday. The Russell was the biggest loser for the day. The index was facing a cluster of moving averages and they are also congregated right at the 1,550-resistance level. This should be nearly impossible to cross unless there is a sudden flurry of headlines or the Fed confirms its dovish stance.


I am neutral on the market until after the G20. The Fed is not likely to move before the G20. That could be market negative on Wednesday depending on how they say it and the tone of the press conference. There is a real battle of appearances shaping up for the G20. Trump and Xi will both want to give the appearance of strength and resistance to the other. At the same time, they both need a deal. There could be a breakthrough but there could also be a break down with a new round of tariffs. I would refrain from being overly long and be prepared to go to cash if the G20 kicks off the summer doldrums.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Tough Market Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Small cap stocks could be rough over the next 8 weeks. With extreme uncertainty for the rest of June, four-day holiday for July 4th and low volume in July and August, small cap stocks may have a hard time recovering from their recent decline. They are still lagging the big caps and falling volume will keep institutional investors in the big caps.



NEW BULLISH Plays

LK - Luckin Coffee Inc - Company Profile

Luckin Coffee Inc. engages in the retail sale of freshly brewed drinks, and pre-made food and beverage items in the People's Republic of China. It offers freshly brewed drinks, including freshly brewed coffee and non-coffee drinks; and food and beverage items, such as light meals. The company operates pick-up stores, relax stores, and delivery kitchens under the Luckin brand, as well as Luckin mobile app, Weixin mini-program, and other third-party platforms that cover the customer purchase process. As of March 31, 2019, it operated 2,370 stores, including 2,163 pick-up stores, 109 relax stores, and 98 delivery kitchens in 28 cities in the People's Republic of China. The company was founded in 2017 and is based in Xiamen, the People's Republic of China. Company description from FinViz.com.

The company is being called the Starbucks of China because there will be a store on every corner. They expect to grow from 2,400 stores in April to 5,000 stores by the end of 2019.

They sell coffee a lot cheaper than Starbucks and are heavy into spiced teas which are popular in China. The stores are small format and only seat 8-12 people with the idea being that Chinese people are always in a hurry. They do not accept cash. All purchases must be made through their app and that allows the company to constantly push coupons to their customers. Sales are expected to rise 3,000% by 2021. Market share is expected to grow from 1% to 23% over the same period according to Morgan Stanley.

Last week the Qatar Investment Authority disclosed they had acquired a 3.25 million share position post IPO of 8.81%. Capital Group, a unit of Capital research Global Investors disclosed they had acquired a 5.8 million share block or 15.6%. Carob Investments, a unit of Singapores soverign wealth fund GIC Private bought a $45 million stake representing a 13.04% ownership position. Hedgefunds Melvin Capital acquired a 1.7 million share stake and Darsana acquired a 34.4 million Class A share stake or 11.12%.

With all these large investors buying large positions which will not be traded, it is shrinking the float and could create some volatile moves as other companies try to follow their lead.

No earnings date available.

Needham rates Luckin a buy with a price target of $27. With a shrinking float any positive news can send shares sharply higher.

Buy LK shares currently $19.17, stop loss $17.65.
Options are still too expensive. The Sept $22.50 is $2.50. Buy at your own risk.



CONN - Conns Inc - Company Profile

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores offer furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home appliances, such as refrigerators, freezers, washers, dryers, dishwashers, and ranges. Its stores also provide consumer electronics comprising LED, OLED, QLED, 4K Ultra HD, smart televisions, gaming products, and home theater and portable audio equipment; and home office products that include computers, printers, and accessories. In addition, the company offers short- and medium-term financing to its retail customers; and product support services, which comprise next-day delivery and installation services, credit insurance products, product repair services, and repair service agreements. As of March 26, 2019, it operated 125 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virgin. The company was founded in 1890 and is headquartered in The Woodlands, Texas. Company description from FinViz.com.

Conns reported earnings of 58 cents that beat estimates for 53 cents. This was up from 40 cents in the year ago quarter. Revenue of $353.51 million missed estimates for $358.39 million. The company has beaten on earnings the last four quarters but missed on revenue each time over the same period.

Analysts have been too aggressive on estimates given the early year weakness in retail sales. Now that retail sales are rebounding, I expect Conns to also show an improvement.

Earnings August 30th.

Shares fell 25% on the missed revenue. For a company that has beaten on earnings for the last four quarters and beat raised Q1 earnings from 40 cents to 58 cents, this is an extreme over reaction. Shares are starting to show life again after trading at $17 for two weeks.

Buy CONN shares, currently $17.66, stop loss $16.50.
Optional: Buy October $20 call, currently $1.55, stop loss $16.50.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Mediocre Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

Small cap stocks gained only 8 points last week and it was a fight. The profit taking from the prior week kept all the indexes to fractional gains as we wait for the Fed announcement and the G20 meeting. There is no reason for investors to load up on stocks before the July 4th holiday. That marks the start of the summer doldrums and buying now risks unforeseen developments at the G20. The Fed is likely to stress patience at Wednesday's FOMC meeting so that will be a non-event.



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


CYOU - Changeyou.com
The long position was entered at the open on Monday.

ASPS - Altisource Portfolio
The short stock position was entered at the open on Monday.


BULLISH Play Updates

CYOU - Changyou.com Ltd - Company Profile

Comments:

No specific news. Shares were rebounding nicely until Friday when hit with a 3% decline. It was more than likely general tech sector weakness with the Nasdaq down sharply.

Original Trade Description: June 5th.

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.

Position 6/10:
Long CYOU shares @ $10.50, see portfolio graphic for stop loss.
Optional: Long July $11 call @ 50 cents, see portfolio graphic for stop loss.



BEARISH Play Updates

ASPS - Altisource Portfolio Solutions - Company Description

Comments:

No specific news. No material movement. Bearish trend intact.

Original Trade Description: June 9th

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.

Position 6/10:
Short ASPS shares @ $19.13, see portfolio graphic for stop loss.
Options are thinly traded and premiums not realistic.



FLEX - Flex Ltd - Company Description

Comments:

The prior week we were stopped out of the short stock position but the long put position remained open. The Broadcom guidance warning caused 4% drop in the stock so the put premium reflated.

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:
Long October $9 put @ 81 cents, see portfolio graphic for stop loss.

Closed 6/4: Short FLEX shares @ $9.30, exit $9.45, -.15 loss.



MYL - Mylan - Company Description

Comments:

Barclay's bucked the crowd and initiated coverage with an overweight rating and $26 price target. Shares closed at $17 on Friday with a minor decline. I still believe we could see single digits as new headlines break.

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.

Update 6/9/19: 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.

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

Comments:

Shares are right on the verge of breaking below $27 but there are too many headlines over the next two weeks to expect a major decline. Once the China trade problem is resolved we could see a rapid decline. Until then we are at the mercy of random tweets.

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.