Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/27/2016

Table of Contents

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

Market Wrap

Big, Fat, Ugly Bubble

by Jim Brown

Click here to email Jim Brown

The market bubble inflated again on Tuesday after Clinton appeared to win the first presidential debate.

Market Statistics

During the debate, Trump said the market was in a big, fat, ugly bubble that would collapse as soon as the Fed began to hike interest rates. He may not be too far off on that prediction but the claim did not impact the market on Tuesday.

I reported last week, since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P.

However, I did not report the statistic that since 1992, the day after the debate the S&P was up an average of .8% according to research by Dan Clifton at Strategas Partners. The S&P rose .64% today so slightly under trend. If the long-term trend holds, the rest of the week through next Monday could be down. Obviously, this is "history" rather than a forecast. The apparent Clinton win on Monday could soften that potential decline because she represents a third term for President Obama and maintaining the status quo.

Helping lift the markets today was a blowout number on Consumer Confidence. The headline number rose from 101.1 to 104.1 and that is the highest level since August 2007. Analysts were expecting a decline to 99.0. The spread between those who believe jobs are plentiful and those who believe jobs are hard to find rose from 4.0 to 6.3 and the largest spread since August 2007.

The present conditions component rose from 125.3 to 128.5 and the expectations component rose from 86.1 to 87.8. Those respondents who believe jobs are plentiful rose from 26.8% to 27.9%. Those having trouble finding jobs fell from 22.8 to 21.6%.

However, there are always rough spots. Those expecting an income increase fell from 18.5% to 17.1% but those expecting an income decrease fell from 11.0% to 10.3%. Those planning on buying a car fell from 12.3% to 11.4%, homebuyers fell from 6.9% to 5.1% and appliance purchasers fell from 50.9% to 49.2%.


The Richmond Fed Manufacturing Survey for September improved slightly from -11 to -8 and the first time since November the survey has been in contraction territory for two consecutive months. All of the top line components contracted. The employment component at -13 is the lowest reading since 2009.

On a positive note the separate services survey rose from zero to 13 and the highest level since the reading of 15 in April. Services snapped back but that survey is highly volatile.



The Texas Service Sector Outlook Survey for September rose from 6.5 to 13.0 and a healthy rebound as well. The business conditions component rose from -5.0 to +4.7 and the highest level since July 2015. The employment component did weaken from 5.8 to 4.4 but still above the recent trend. This report is normally ignored.

The economic calendar for Wednesday is somewhat scary. With five Fed heads speaking plus Yellen's testimony to the House on financial regulation. They will probably discuss stress tests, banks trading commodities, Wells Fargo and executive compensation. Monetary policy and the impact of the election. Trump has accused her of being political and keeping rates low to keep the market high and keep democrats in power.

Yellen is probably going to maintain an even tone and try not to make waves on any topic in an effort to be nonpolitical. If Trump wins the election, I would expect her to resign shortly thereafter.

Actually, regardless of who wins, I would expect her to resign so she is not blamed when the Fed begins to raise rates and the next recession appears.

The next president, regardless of party is likely to preside over a bear market, recession, rising debt limits and rising interest rates, not necessarily in that order. There is a tremendous incentive for Yellen to announce her retirement once the new president is sworn in.

The expectations for a November rate hike have fallen to only 8.3% and the December chances have fallen to 47.6% and well below the 54.2% on Friday.



I added a new item to the calendar. The deadline for the Senate to approve at least a stop gap budget measure and avoid shutting down the government is midnight on Friday. An attempt to pass something on Tuesday failed 45-55 after weeks of negotiations. The democrats are demanding money to be allocated to fix the Flint Michigan water crisis. Republicans are promising to tackle the problem after the election in a separate Water Resources bill but democrats are objecting and want it in the U.S. budget bill. The proposed temporary funding bill would keep the government running through December 9th and provide $1.1 billion for fighting Zika. I find it hard to believe Senators would let the government shutdown only a month before the elections. That would bring people to the polls but they would be chanting "throw the bums out."

Another market mover could be the headlines out of the OPEC meeting on the sidelines of the Algerian energy conference. If talks break down, we could see $40 oil very quickly. Oil prices were down intraday but rallied after the close when the API inventories reported a decline for the fifth consecutive week. Analysts were expecting a 3 million barrel build and saw a -752,000 decline instead. Distillates declined -343,000 barrels and gasoline fell -3.7 million barrels.


In stock news, Twitter (TWTR) rallied to $23.75 after news broke that Microsoft (MSFT) and Disney (DIS) were also considering making an offer in addition to Google (GOOGL) and SalesForce (CRM). We exited the Twitter position in the Ultimate Investor Newsletter at the open this morning. I have very little confidence that a deal will be done at a significantly higher level. Even if one is announced, it will take months to close and shares are likely to weaken until nearer to the closing date. I know for sure that option premiums will evaporate instantly once Twitter announces a price and a deal. I would recommend not being greedy here if you are holding a position in Twitter.


Kite Pharma (KITE) shares rallied +9% after a clinical study of its lead cancer therapy met its primary goal. A mid-stage study showed that 76% of patients with Non-Hodgkin Lymphoma responded well to the treatment, while 47% showed a complete remission. The CAR-T treatment is the first of its kind to show significant progress and the company will now file for formal approval of the process with the FDA. Novartis (NVS) and June Therapeutics (JUNO) are also working on CAR-T therapies. The patient's own T-cells are removed and reengineered to identify and kill malignant blood cancer cells. The current treatment is by chemotherapy, which has an 8% response rate.


American Express (AXP) announced a 10% hike in its dividend to 32 cents payable on November 10th to holders on October 7th. The company also announced a 150 million share buyback program. However, that replaces a prior program that had 50 million shares not purchased so the net impact is only a 100 million share increase. After the recent stress tests the Fed approved the company's plan to buy back $3.3 billion in shares through the end of Q2-2017. The timing of the buybacks and the quantity are at the company's digression. Shares rose only fractionally.


Jelly maker JM Smucker (SJM) shares fell -$4 after a downgrade by Credit Suisse from outperform to neutral. Credit Suisse said commodity inputs have bottomed and the company would not get any further benefit from falling prices. The analyst singled out the pet food division where Nielsen tracking has shown a -2.2% decline in sales over the last four weeks compared to -1.4% over the last 12 weeks.


Shares of AutoZone (AZO) gained $20 after Morgan Stanley upgraded the company from equal weight to overweight. The analyst said the rising number of older cars on the road suggested AutoZone's business was going to improve since older cars need more parts to keep them running. More than 85% of AutoZone's inventory is failure and maintenance related products. Low gas prices tend to lead to more miles driven and more failures on older cars. Winter is hard on automotive components and it causes more failures and the need for replacement parts.


Deutsche Bank (DB) posted a fractional gain on Tuesday after making a historic low on Monday. Their problems are legion including a $14 billion fine from the U.S. Justice Dept over subprime loans. That may be the least of their worries. The bank is facing a steep capital raise and probably some extreme dilution at this level. People are warning of a potential Lehman type event at DB. Others do not believe DB will fail but they have significant problems and depositors are fleeing to avoid a European "bail in" where depositors and debt holders see their holdings cut to help liquefy the bank. With the yield on the German Bund at -0.08% it discourages savers from keeping money in the bank when they can get a higher yield almost anywhere else. These capital outflows are sinking DB. Chancellor Angela Merkel has said she will not bail out the bank. Meanwhile the European banks are sucking all the oxygen out of the European markets.

The Credit Suisse CEO said today that Q3 was going to be a tough quarter and would lead to 1,200 additional jobs on top of 4,800 already cut this year.


After the bell, Nike reported earnings of 73 cents compared to estimates for 56 cents. Revenue of $9.06 billion beat estimates for $8.87 billion. While the earnings were good, there was a problem. Future orders were 7% compared to estimates for 8.3%. Orders rose only 1% and analysts were expecting 5% because of the post Olympics ordering. That is the third consecutive quarter the company missed on future orders. Nike said it would no longer report futures orders with earnings. I guess if the number is bad then do not tell anybody. Adidas is said to be surging in the athleisure sector and Under Armour is also seeing rising market share.

Nike also said its profit margins fell -125 basis points compared to a 30-50 point rise in the prior quarter. Inventory levels also surged and they took a hit on their markdowns in an effort to exit the golf equipment business. Shares fell sharply to a 3-month low in afterhours.


Sonic Corp (SONC) reported preliminary earnings of 43 to 45 cents compared to analyst estimates for 47 cents. The restaurant chain expects revenue to decline -2%. They will not report actual earnings until Oct 24th and the warning caused a $2 drop in afterhours.


Tempur Sealy International (TPX) warned after the close that full year sales would decline -1% to -3%. In 2015, the company reported revenue of $880 million and analysts are expecting $911 million in 2016. A 3% decline would be in the vicinity of $853 million. The company also reduced EBITDA estimates from $525-$550 million to $500-$525 million. Shares fell -20% from $75 to $55.


After the debate Clinton was the assumed victor because of her calm, fact filled answers. Analysts had picked several stocks that would rise with a Clinton presidency and they were all up on Tuesday.

Deutsche Bank said buy FSLR, C, NFLX, UNH and FB.
Zacks said buy FSLR, LMT and PFPT.
Estimize said buy FSLR, UNH, FB, NFLX and CYBR.
InsiderMonkey said buy FSLR, CREE, TSLA, UNH and HUM.

Notice anything similar in those recommendations? First Solar was in every one. That stock is off to the races with a 5% gain today.


If you watched the debate, you probably have a clear idea who won. I thought Clinton won because she succeeded in getting in Trump's head and her responses were fact filled and presented rationally. I am not expressing any favoritism, just a rational view of the physical debate.

However, I must have been watching the wrong debate. The DailyMail.com, a UK website, collected all the available snap polls and published them on one page. Link Here

The polls show Trump won by a landslide. I was in shock. There are some obvious errors in the sampling since the Drudge Report and Breitbart are conservative leaning sites and therefore should have shown a preference to Trump. However, there are a lot of polls and even the ones with a liberal democratic bias like ABC had a respectable showing for Trump even though he did not win their poll. The CNN poll was very slanted. Conservatives call it the Clinton News Network because of their bias.

Which debate were you watching on Monday night?


The initial ratings are in at 81.4 million viewers but that will continue to rise because it does not capture all the cable channels or the streaming broadcasts. The S&P futures were down -5 points at 10 minutes before the debate started and then reversed back to positive territory 15 min after the debate started and Clinton was already starting to wear down Trump. The market clearly wants a Clinton victory and would prefer the republicans maintain control of the House and Senate so that nothing changes and we have four more years of the current administration.

Markets

The majority of the market gains were at the open and then again at 10:30 when the economic reports were released. The S&P hit a high of 2,160 at 12:00 and was perfectly flat the rest of the day to close at 2,159.86. The morning gains were all short covering in big cap tech stocks. IBM was the biggest gainer on the Dow.

The S&P ended the day right in the middle of the congestion range from the last two months. It closed above support at 2,150 but below resistance at 2,175. The S&P futures are down -5 as I type this so tomorrow could start off negative.


Despite having only one Dow component in negative territory the Dow failed to return to resistance at 18,250. The +133 point gain failed to erase the -166 point decline from Monday. The Dow is in a dangerous place. If it cannot rebound over that initial resistance in the next couple days, the probability of a retest of support at 18,000 will increase. The overall pattern is now negative and that suggests a retest would fail. I am not predicting that but if the historical trend prevails this could be a rocky week.



The Nasdaq 100 ($NDX) is the 100 largest cap stocks in the Nasdaq Composite. The top five stocks make up 40% of the weighting in the index with the other 95 stocks having 60% of the weighting. When AMZN, FB, GOOG, AAPL, MSFT are positive the index will be positive.

The Nasdaq rebounded 1% to 4,866 and only 25 points below a new high. If the NDX was able to break out to another new high, it could energize the rest of the market. Support is 4,800 and the old high from last Thursday is 4,891.



This was a big cap tech rally. The small caps barely moved. The Nasdaq 100 gained +1.02% and the small cap S&P-600 gained +0.16% and the mid cap S&P-400 gained +0.11%. That may have been portfolio managers throwing money at the big caps so the market does not run away from them but there were very few buyers in the small/mid caps. Until the portfolio managers begin moving back into small caps the market rally will lack conviction.



I would continue to caution not to be overly long until the market picks a direction. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Make a shopping list of stocks you would like to buy at a lower level and you may get your chance.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Too Much Competition

by Jim Brown

Click here to email Jim Brown
Editor's Note

The fast casual restaurant boom over the last ten years has left the landscape littered with stores that are no longer drawing crowds. Zoes Kitchen is one of those restaurants. Same store sales are barely rising and the company is cutting guidance. The fast casual space is being overrun with brand names and multiple brands appearing in the same general area means everyone has weaker sales.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

ZOES - Zoes Kitchen - Company Profile

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Sell short ZOES shares, currently $23.95, initial stop loss $25.65

No options recommended because of price but Nov $22.50 put is $1.10




In Play Updates and Reviews

Lackluster Small Cap Gains

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes posted lackluster gains and that is troubling for Wednesday. After big declines in the small caps on Monday, the lackluster gains today support a cautious view of the market. The S&P-600 gained only 1 point and the Mid Cap 400 only gained 1.75 points. The Russell 2000 did a little better with a 5 point gain but still mediocre.

The big cap indexes rebounded with short covering at the open but then flat all afternoon. That suggests we should keep a cautious eye on support levels.




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


PPC - Pilgrims Pride
The short stock position was opened at $20.94.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Company exhibiting new products at the SCTE/ISBE Cable-Tec Expo this week.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



BOX - Box Inc - Company Profile

Comments:

No specific news.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



EXEL - Exelixis - Company Profile

Comments:

No specific news. Shares closed at a new high.

Original Trade Description: September 24th.

Exelixis, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of new medicines with the potential to enhance care and outcomes for people with cancer. It focuses on advancing cabozantinib, an inhibitor of multiple tyrosine kinases, including MET, AXL, and VEGF receptors, which has shown clinical anti-tumor activity in approximately 20 forms of cancer and is the subject of a broad clinical development program. The company has received regulatory approval for two separate formulations of cabozantinib for the treatment of certain forms of kidney and thyroid cancer and marketed as CABOMETYX tablets in the United States and COMETRIQ capsules in the United States and European Union respectively. It also offers COTELLIC (cobimetinib), a selective inhibitor of MEK, in the United States and European Union; and is being evaluated for further potential indications by Roche and Genentech under collaboration with Exelixis. Exelixis, Inc. has collaboration and license agreements with Ipsen Pharma SAS, Genentech, Inc., GlaxoSmithKline, Bristol-Myers Squibb Company, Sanofi, Merck, and Daiichi Sankyo Company Limited for the development and commercialization of various compounds and programs. Company description from FinViz.com

Potential cancer drugs are the main focus of the big cap drug companies. They believe a breakthrough in cancer treatment is just around the corner and the drug that turns into a silver bullet is going to be obscenely valuable. With over 200 types of identified cancers no one drug has been able to affect them all.

Exelixis has multiple drugs in process and cabozantinib has proven effective in 20 different forms of cancer. The company appears well on its way to finding that silver bullet.

The stock is on fire as more investors decide the company will be acquired. If the price is anything like the Alergan (AGN) purchase of Tobira Therapeutics (TBRA) last week any takeout price could be astronomical. TBRA closed at $4.73 and spiked to $40 the next morning.

Earnings Nov 2nd.

Update 9/26/16: In the past 30 days, 3 quarterly estimates have gone higher for Exelixis while none have gone lower in the same time period. The trend has been pretty favorable too, with estimates narrowing from a loss of 16 cents a share 30 days ago, to a loss of 13 cents per share today, a move of 23.1%.

Meanwhile, Exelixis’s current year figures are also looking quite promising, with 4 estimates moving higher in the past month, compared to none lower. The consensus estimate trend has also seen a boost for this time frame, narrowing from a loss of 71 cents a share 30 days ago to a loss of 63 cents per share today, an increase of 12.7%.

I know the stock has been a rocket lately but analysts still believe it is undervalued. With the speculation in the biotech sector the rocket could continue higher. If we can just get a couple days of gains we can tighten up the stop loss and let it ride. Hopefully it will be on somebody's shopping list.

I have wanted to add it for the last couple weeks and kept thinking it would take a rest. It is not happening. Every day I look at it again and it posted another gain.

Position 9/26/15 with an EXEL trade at $15.10

Long EXEL shares @ $15.10, see portfolio graphic for stop loss.

No options recommended due to cost.



KS - KapStone Paper & Packaging - Company Profile

Comments:

No specific news.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.




BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile

Comments:

No specific news and no rebound in a bullish market.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.

Optional:

Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Minor rebound from a new 4-month low.

Original Trade Description: September 19th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The VXX gave back the $2 bounce from yesterday with a $2 decline today. Close to new historic lows.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product 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 ETF. 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, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. 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 will 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.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.





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