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19 Sep

Monday September 19, 2016

by

Good morning,

My hope of a continuation of Friday’s selloff of the major indexes was dashed with the spectacular 11.4% rise in the share price of Apple Computer (AAPL) following reports of a better-than-expected launch of the new iPhone 7 and iPhone 7-plus.  At the close of trading on Friday, the DJIA, S&P 500 and NASDAQ rose 0.21%, 0.53% and 2.31%, respectively, as the standout this week, NASDAQ, continued to trade above its 50-day moving average.

After trading as high as 20.51 at the opening bell on Monday, the VIX collapsed back near its 200-week moving average, settling at a relatively-neutral reading of 15.37.  

Though, historically, still somewhat low, a reading of 15 indicates traders are divided whether stocks rebound from here, or continue to sell off.  Is it a wonder why Goldman Sachs radically changed its handicap for a Fed hike this month to 25% from 55% following Jackson Hole?

Bottom line on Goldman Sachs: anything coming out of this bank regarding monetary policy should be ignored.

The price of a barrel of West Texas Intermediate Crude (WTIC) dropped significantly by $2.26, a 4.93% move down, to close at $43.62, the performance of which put additional pressure on the banking sector throughout the week.  The KBW Banking ETF bucked the trend of the major indexes by the close of trading Friday with a 1.62% drop for the week.  

I expect WTIC may remain range-bound between $40 and $50 until after the election.  The exception to that expectation is a surprise policy move taken by the Fed prior to the election, a move I really don’t believe will be scheduled by the Fed until, maybe, December.

Traders of gold and silver were less than enthralled to maintain positions while oil prices softened; a stock market not correcting lower; and the U.S. dollar strengthening against its major rivals and emerging markets currencies, as the sharp drop in the Mexican peso this week reminded traders of the heightened risk at this time of straying too far from safe haven assets.  

In my opinion, this is not a good time to be betting against the U.S. dollar; it is an election year, you know.  A weaker dollar will most likely come by way of a whiff of change to present Fed policy leanings, of which is what, exactly?  

Well, that’s my point: until November the Fed wants to obscure and obfuscate around taking any action through to November without incident, is my guess.  

Did Friday’s orderly plunge in the major indexes induce the Wall Street Journal’s Jon Hilsenrath, the Fed mouthpiece at the Journal, to pen an article on Tuesday, titled, Divided Federal Reserve Is Inclined to Stand Pat, wherein he writes:

Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates.

It is a close call. But with inflation holding below the Fed’s 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.

“It’s a close call,” he writes.  Sure, Jon, sure.  It appears the Fed actually had been spooked on Friday and called the Journal to spread the word that September is ‘off the table’ as a method of putting out a fire that was about to spread, is my guess.  This week, federal funds futures now show a 18% chance of a rate hike in September, down sharply from 32%.

Bottom line on Hilsenrath: he, too, is a shill for the Fed.  Oh, and by the way, if you don’t subscribe to the WSJ, no problem; the Journal wants you so badly to be informed by Jon Hilsenrath that access to his dribble is free of charge.  

To read almost anything else on the WSJ site, of course, you need a subscription, which I fortunately have.  I (and anyone with an Internet connection) need not use a password to read Hilsenrath’s latest words of wisdom about the Fed.  See, former-Fed Chairman Bernanke did promise us more transparency from the Fed during his first Humphrey-Hawkins testimony, way back before the 2008-9 meltdown.  Didn’t he?  You got it.  Read Hilsenrath.  

Well, anyway, hedge funds know Hilsenrath is Fed operative, all too well, and I think the hedgies got the ‘green light’ to buy the 18,000 and 18,050 range on the DJIA —which was bought on four separate trading sessions this week!  

But the market is much, much bigger than the Fed when it wants to be ( $1.2 quadrillion bank balance sheets versus $4.8 trillion Fed balance sheet), so I’m still cautious here.  As I see it, a meaningful break below 18,000 may take us straight down to the 200-day moving average, to around 17,500, my target.

Oh, and if you didn’t notice, the U.S. Treasury 10-year/two-year spread notched up again this week by another five basis points, widening the rate spread between the two maturities by 22 basis point in only three weeks.  That’s a lot of basis points at these low level of rates.  Let’s see what happens when the Bank of Japan (BOJ) meets on Tuesday and Wednesday (Sept. 20 & 21).  Here’s a good article from zerohedge about why the BOJ meeting this week may be important to traders of U.S. indexes this week.

Okay, let’s talk stocks.  

I made no trades this week, but have two interesting plays I want to share with you.  One is a cybersecurity software company, and the other is an interesting biopharmaceutical.

This Week’s JBP Stock Ideas

LIQUIDMETALS (LQMT)

Not much action to report about LQMT this week.  The stock did trade as low as $0.166 and as high as $.177 before settling the week at $.169, down 3.43%.

I started this position with 200,000 shares and took half off last week +17% +$2,500. I still own 100,000 of LQMT at a price of $.14 per share (up 23.3%), with a profit of $3,000 in three weeks.

ASURE SOFTWARE (ASUR)

On September 7, I bought 2,000 shares of ASUR, clustered in the $5.30’s.  This week was a winner for me, as the share price of ASUR soared $0.46 (8.55%) to close the week at $5.84.  So far, I’m up an average of $0.49 (9.1%) per share and $980 for the trade.

If you remember from last week’s LT Report, I wrote:

As far as my expectations of the stock’s price action, I’m watching the $5.40 – $5.50 range for how much resistance traders demonstrate if/when the stock reaches that range.  If resistance is weak, my sights are on $6, a level at which the stock would then trade at 33-times earnings.  That’s not at all an unreasonable forward P/E for this stock.

Well, here we are a week later.  ASUR did test and smash through the $5.40 – $5.50 range, breaking out to a new range.  I’m $0.16 short of my $6.00 target, and I’ll let you know what I decide if/when ASUR gets to $6.00.  Make a note: I nailed this trade.

MAST THERAPEUTICS (MSTX)

I’m excited about MSTX because I think traders misread an event that took place on Tuesday, which led to a trashing of the stock by as much 42% on that day.  The stock has since recovered some of the losses incurred by the catastrophic two-day plunge with a decent rebound, but there’s still blood in the street.  I see an opportunity here for a possible 25%, or more, gain in the coming two weeks, at the latest.

Apparently, the scuttlebutt about MSTX is: at the time of Mast’s presentation at the very prestigious Rodham & Renshaw Conference in New York, instead of Mast CEO, Brian Culley, announcing expectations of completing a successful study of the company’s phase III trial at the FDA to determine efficacy of its lead drug, vepoloxamer, for the treatment of sickle cell disease (SCD), Culley merely gave a presentation about an overview of the company.  

That’s not what investors expected.

Can you imagine a bunch of interested parties at the conference in real-time contact with traders, who are waiting for the big nod that the coast is becoming more clear for an FDA approval of vepoloxmer?  But instead of an exciting announcement from the CEO, the audience at the conference receives a slide show presentation of an overview of the company?  

Traders panicked, thinking that no preliminary data from phase III trials presented at the conference means the trial was a bomb.

Not so fast.

Okay, so what is the issue surrounding vepoloxamer?  Simply, the drug is purported to heal torn cell membranes that result from cells sticking together and collecting like a clot in patients suffering from SCD.  The interesting characteristic of the drug is that, vepoloxamer isn’t absorbed by the body; it apparently serves as a ‘bandage’ for torn cell membranes and for as long as needed to heal the cell, then falls off and excreted through the urinary tract.  Interesting.  No?

This particular Mast phase III FDA trial is called: the EPIC study.  The company had promised top-line results from the EPIC study by the end of September, this month.  The study began in February, the results of which were projected to be in by the end of September.  

Mast has made no mention of an expected delay.  

And with less than two weeks left until the end of the month, my assumption is that, the company will deliver the EPIC study results within two weeks.  That’s why I alert you to MSTX.  Typically, if there was going to be a delay, the company would have known about it much earlier than Tuesday, at which time would have been a perfect opportunity to fully explain the delay to so many important and influential investors in one room at one time.  That didn’t happen.

So, instead of traders losing their heads about Culley not mentioning the EPIC study results at the conference, I think traders should have viewed the silence on the matter as an indication of the poise demonstrated by the young Mast CEO.  

What would Culley stand to gain for prematurely stoking everyone up about vepoloxamer?  Nothing.  What if he said something that later turned out to be false information, no matter how small.  Is it worth the possibility of misconstrued comments made by a CEO taken to the SEC as a violation?  

I believe Culley did the right thing by not saying a word about the EPIC study until the data come in.

So, what’s the trade?

When/if the EPIC trial results are release in the coming days, watch for the primary endpoint of the trial, which is the reduction of the duration of what’s called “vaso occlusive crisis” (VOC), the acronym used to describe the build-up of cells in blood vessels, resulting in significant pain and danger to the patient’s health, including death.  In short, if the results of the EPIC study demonstrate a significant reduction in VOC, the drug should then be classified as efficacious by the FDA in this study, and the stock soars!  

Soars?  By how much?  I anticipate MSTX to clear $0.70 like a hot knife slicing through butter (if it doesn’t already trade above $0.70 at the time of the release), then assault the January 2014 level of $1.00.  

In all, I’m looking at a potential 60% gain on good news in the coming days.  I’ll keep you informed of any positions I take in MSTX, which may come from a test of the $0.50 level.

FIREEYE (FEYE)

FireEye is a cybersecurity software company, and has been trading on NASDAQ since September 2013, at which time FEYE opened at $20.  

By March 2014, the stock reached as high as $97.35.  The stock then retraced almost all of its gains made in that six-month buying frenzy to trade as low as $25.58 by mid-May or 2014.

By June 2015, FEYE had rallied back up to $55.00, but has steadily declined since to the near-record low of $14.02, a typical pattern for many newly-listed stocks trading on NASDAQ.  

Nevertheless, stockholders complained, which may have led to the Chairman of FireEye’s Board of Directors and founder and technical visionary, Ashar Aziz, to abruptly quit on September 9.  Traders were shocked to hear that a 12-year-tenure founder and Chairman leaving the company as abruptly as he did.

Since FireEye’s listing on NASDAQ, the company has never recorded an operating profit.  For the past three year, operating expenses continued to better revenue.  

So there’s a new CEO, Kevin Mandia, who has indicated to investors that he intends to slash operating expenses by as much as $30 million to achieve profitability at FireEye.  

Thus far, Mandia has managed to cut $7 million from operating expenses, as reported for Q1.

So, what I’m looking at here is a ‘turnaround’ stock.  And as loyal, long-term subscribers know about me: I like turnaround stocks.

Here’s what my research about FireEye tells me about the chances of a successful turnaround.  First, Mandia is absolutely correct in his cost-cutting measures at the operating level.  Palo Alto Networks, for example, spends much less as a percentage of revenue on operating expenses as FireEye spends.  Fortinet, another close comparable, spends not much more than Palo Alto spends to operate its company.  So, already I’m feeling warm about FireEye’s turnaround strategy.

Second, and I get this analysis from a technical adviser of mine, who tells me the focus of FireEye should be on its subscription billing and product offerings from the company’s subsidiaries, Mandiant and iSIGHT.  With a renewal rate of more than 90%, subscriptions have been a key driver of base income for the company.  And that’s what Mandia intends to do, that is, move back to the basics of the company’s initial business model of securing and retaining long-term clients, if I’m reading him correctly (I think I am).

The next step, third, is to expand the company’s offerings, which is what I expect Mandia to discuss in the company’s next earnings call, scheduled for November 2.  I’ll be looking specifically for that piece of information and progress made.

In essence, there are not many moving parts to this company.  In my opinion, profitability may come from Mandia maintaining focus where the company excels and by expanding on that excellence.  

The cybersecurity industry has become very competitive.  If FireEye focuses on its strengths; increases its marketing effort to regain some of market share t lost by taking on too many competitors at once; and expand its offerings from a leaner operation, the results should improve the bottom line enough to excite investors back into the stock.

In this business of stock trading, turnarounds sometimes take a long time; but traders reward other traders who get in first prior to tangible results becoming apparent to everyone else.  Then, new projections of revenue and earnings begin anew, including a lifting of sentiment and a changing of the tide back to a bullish stock trading pattern.  In essence, in this play, I’m looking to capture the initial and largest percentage returns of a turnaround in the stock price that comes from evidence of a successful turnaround in the company’s profitability.  I’ll leave the scraps to other traders.

I let you know if/when I strike on FEYE, which may be at the $13.00 level.  

Trade Green!

Jason Bond

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