Option Investor
Newsletter

Daily Newsletter, Thursday, 9/29/2016

Table of Contents

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

Market Wrap

Beware OPEC And Their Gifts

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

OPEC inked a deal but what do we really get? High production levels, oversupply and no change to fundamentals. The deal caps production but at the highest levels in over 10 years and well above production levels earlier this year when production caps were first discussed. So, we have a deal that does even less to alleviate oversupply than the first attempt and leaves the market supported by hot air and promises. Based on today's price action it looks like the market is beginning to realize that. The surge in equities and oil sparked by the OPEC announcement is already stalling.


International markets were also buoyed by the OPEC news. Asian indices gained in the range of 0.5% to 1.25% but gains were capped by reports of violence in India. The news, Indian Army regulars clashed with rebels in the long disputed Kashmir region. European indices were likewise affected, first up on OPEC driven euphoria then down as the reality of high OPEC oil production set back in to cap gains.

Market Statistics

Futures trading was a bit mixed and little choppy this morning. The US indices were indicated to open around the flat line for most of the morning with some fluctuations throughout. The market opened with small losses and hovered just below the break even level for most of the morning. By 11AM bearish sentiment took over and drove the indices down to intraday lows near -0.25%. These lows held for an hour and a half or so until a decisive move by the bears pushed them down to new lows just over -1%. Intraday low was hit just before 2PM at which time a snap-back rally erased about half of the day's losses. The bounce did not last, the indices retreat back toward the low of the day in late afternoon where they languished until the close of the session.

Economic Calendar

The Economy

There were two reports today, other than the weekly jobless claims, and the message hasn't changed; economic growth is tepid and spotty with ongoing signs of health in the labor market. Initial jobless claims gained 3,000 on top of a downward revision to last week of -1,000 to hit 254,000. This is the 82nd week of claims below 300,000. This weeks figure is just above the long term low and consistent with improvement in the labor markets. The four week moving average of claims also fell, shedding -2,250, to hit 256,000. On a not adjusted basis claims fell -3.7% versus an expected drop of -4.5% and is just above the long term 43 year low. Year over year, not adjusted claims are down -7.9%.


Continuing claims fell -46,000 to hit 2.062 million and a new low not seen since July of 2,000. The previous week was also revised lower. The four week moving average of continuing claims fell -23,750 to 2.11 million, it's lowest level since 2,000.

The total number of claims fell by -30,737 to hit a new 1 year low or 1.874 million. This low is not unexpected and is in-line with seasonal and long term trends. On a year over year basis total claims are down -5.5% and are consistent with ongoing labor market health. Based on the seasonal trend we can expect to see total claims drift lower for another 3 to 4 weeks, my final target is still below the 1.80 million mark. Altogether the labor data looks pretty good. Next week is the next round of monthly labor macro-data, based on the claims figures I think we can expect to see job growth remain steady at least, low levels of lay-offs, an increase in wages and high levels of job openings.


The 3rd estimated for 2nd quarter GDP was revised higher by 0.3% to 1.4%. This is above analysts estimates and helps improve the full year outlook. First quarter data held steady at 0.8%. The Atlanta Federal Reserve's GDP Now tool estimates 3rd quarter GDP at 2.8%, a number supported by labor data at least. Kansas City Federal Reserve President Esther George said today in an interview that she believes the time to "remove... accommodation" is now. The CME's FedWatch Tool shows only a 10% of rate hike at the November meeting and a 50% chance in December.

Pending Home Sales fell by -2.4% and raises some fear the housing recovery could stall out. This is the 3rd month in 4 for decline and the second lowest level of sales this year. On a year over year basis pending sales are down by -0.2%. Lawrence Yun, economist at the NAR, says that low inventory is the culprit and that if there is not an increase, either in existing or new home construction, the housing recovery could stall. He notes that new construction has not kept pace with labor market recovery adding to inventory deficits. On the positive side, new construction could be spurred by these conditions, next report on construction spending is next week.

The Dollar Index

The Dollar Index made some gains today but they were capped by resistance. The index remains range bound, trending over the past few days in a near straight line just below resistance at the mid-point of the range. Over the past few weeks and months the index has been winding up on global central bank policy and is now at a possible peak, ready to break in one direction or the other. This move could be sparked tomorrow with Personal Income/Spending and PCE data, maybe next week with labor data. In either event the move will likely leave the index range bound, but moving toward upper resistance near $96.60 or lower support near $94.50. Looking further out, I expect to see more sidewinding market wind-up going into November and the next FOMC meeting.


The Oil Index

Oil prices have surged on knee-jerk reaction to the OPEC deal but that surge already appears to have lost some of its oompf. WTI gained just shy of 2% today in choppy trading and met resistance at the $48 level, just like it did earlier this month. Near term oil prices are supported but they remain range bound longer term and at/near the top of the range. Longer term outlook is bearish, fundamentals are still supply side heavy so I expect to see prices come back under pressure.

The Oil Index gained about 0.85% in a move that extended yesterday's long white candle but failed to even reach the upper range boundary. The index remains range bound with a chance of testing the upper limit, near 1,180, in the near term. The indicators are consistent with rising prices within a range and do not show signs of strength at this time. I think the risk at this time is that the bottom could fall out of oil prices as the OPEC deal fades from importance, and bring the entire Oil Index down with it.


The Gold Index

Gold prices held steady above $1,320 and critical support levels. Trading was a little choppy here as well as the OPEC deal, economic data and FedSpeak rippled through the market. Prices are likely to remain range bound between $1,310 and $1,350ish in the near term, until the next FOMC meeting, unless economic data or another central bank makes some change to policy.

The gold miners were able to hold steady in today's action as well and continue to show support at current levels. The miners ETF GDX posted a net loss near to -1% but created a white bodied candle above support levels. Support appears to be rising from $25 to $27 and is supported by the indicators. MACD momentum is bullish although weak while stochastic has begun to tick higher again, a set up that could easily lead to a strong trend following signal. The caveat is that while there is support, there is also some resistance to higher prices that has resulted in wind-up similar to that found in gold and the dollar. A break out of this formation, if driven by a fundamental change in gold/dollar value, could lead to a significant movement in the ETF. Upside target is near $32.00, downside target is near $22.50.


In The News, Story Stocks and Earnings

Pespico reported earnings before the bell. The global snack and drink powerhouse, competitor to Coke and proud product of North Carolina reported revenue and earnings above consensus estimates and raised full year guidance to slightly above consensus. The results are driven by strong global demand and the company's ability to “manage what is in our control”. Shares of the stock were lifted by the news and gapped up at the open to trade just below the current all time high. Shares sold off during the day but were able to close with a gain of near 0.35%.


Conagra delivered nice results this morning driven by long term efforts to streamline operations. The company reported a 10% increase in GAAP earnings, +49% on an adjusted basis, that beat analyst expectations. Revenue was down about -5% but given the fact it is largely due to divestiture, foreign exchange and a voluntary “improvement” in the revenue base still a strong number. Margins also improved, 200 basis points, and helped drive shares of the stock up by more than 7.5%. The stock is now trading near a one month high and looks like it is headed up to retest resistance at the recently set all time high near $48.35.


Deutsche Bank was one of the biggest draggers on the market today, hitting fresh all time lows as the crisis deepens. The latest concern is that hedge funds which normally do business with the bank are pulling out. There are growing concerns the banks ties to the global banking community make it's fall a systemic risk with Lehman-like consequences. The news caused the stock to drop more than -6% from yesterday's close to set a new low.


The Indices

Volatility persists. The indices made another move greater than 1%, this time to the downside, but within near term trading ranges. Today's leader was the Dow Jones Transportation Index which managed to shed only -0.25%. The transports did not make a strong move today; the candle is a spinning top doji within the near term trading range, indicative of indecision and lack of market direction. The indicators are consistent with a move up, within the trading range, so upper resistance, near 8,100, may be tested. Support is a little below today's range, near the short term moving average, at 7,900.


The S&P 500 made the next smallest loss, about -0.93%, but created a med/large black candle. The candle is not significantly strong by itself but it's size does lend weight to the bearish argument. Two things to note, the candle is confirming resistance below the all time high and it is falling beneath the short term moving average. The indicators are bullish, consistent with a test of resistance, but also consistent with range bound trading so a break to the upside does not look likely. Support is at 2,120, the bottom of the 3 month range, and also does not appear like it will be broken any time soon.


The NASDAQ Composite is the next big loser, shedding -0.93% and equal to the SPX. The tech heavy index created a medium sized black candle sitting on the short term moving average and could easily move lower. The indicators are mixed, they show upward bias but are very weak and inconsistent with what we would typically be seeing if the index was about to make a break higher. The index is sitting on support, 5,250, a break of which would be bearish and could take it down to 5,100 in the near term.


The Dow Jones Industrial Average made the largest decline today, a little over -1%, and looks set to keep trending sideways into the near term. The index created a medium sized black bodied candle confirming resistance at the short term moving average near 18,250 but not an overly strong one. The indicators are pointing higher, contrary to today's move, but consistent with range bound trading in the near to short term. Support is near 18,000 and if broken will lead to additional support along the rising up trend line just below the 18,000 level.


Market shake up continues. The indices remain trapped within near term ranges with little indication of which way they will go once they break out. The good news is that the longer it takes for a break out to occur the closer we get to what is expected to be a return to earnings growth. If, in between then and now, nothing happens to alter the forward earnings outlook we could very well see the next major bull rally begin at or near today's index prices. The risks, as I've mentioned before, that not coincidentally occur about the time the indices will hit their respective long term up trend line include the next FOMC meeting, the peak of 3rd quarter earnings season and the presidential election. I remain cautious but growing more and more optimistic that once we get past these hurdles the path higher will be much easier.

Until then, remember the trend!

Thomas Hughes


New Plays

Risky Business

by Jim Brown

Click here to email Jim Brown
Editor's Note

The S&P futures are down -8.00 as I type this and dropping fast. If we put on a new position at Friday's open it could either be the high of the day or the low for the day and we do not know which it will be. With weekend event risk from Deutsche Bank we are better off waiting until Monday to launch any new plays. Very bad news tends to happen on Monday mornings.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Ugly Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes gave back two days of gains as the European banking system implodes. The problems with Deutsche Bank (DB) continue to roil the market. News reports of hedge funds, corporations, banks, brokers and corporations all pulling deposits out of DB caused additional fears of a Lehman moment approaching. DB claims it has no solvency problems but Lehman said the same thing until a couple days before they collapsed. The bank cannot admit to any weakness or the deposit flight would only become worse. They have to keep up a strong front but that front has visible cracks around the edges.

The stocks in our portfolio barely moved in a very bad market. That is extremely encouraging. ZOES was the only big mover and it was in the right direction. Friday could be a bad day because it is month end, quarter end and the S&P futures are down -6.75 as I type this.




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


CREE - Cree Inc
The long stock position remains unopened until a trade at $26.00.



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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



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. Shares holding at resistance.

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. A breakout to a new 14-month high in a bad market.

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.



CREE - Cree Inc - Company Profile

Comments:

No specific news.

This position remains unopened until a trade at $26.

Original Trade Description: September 28th.

Cree, Inc. provides lighting-class light emitting diode (LED), lighting, and semiconductor products for power and radio-frequency (RF) applications in the United States, China, Europe, South Korea, Japan, Malaysia, Taiwan, and internationally. Its Lighting Products segment offers LED lighting systems and bulbs for use in settings, such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, and other applications. This segment sells its products to distributors, retailers, and customers. The company's LED Products segment provides blue and green LED chip products for use in various applications, including video screens, gaming displays, function indicator lights and automotive backlights, headlamps, and directional indicators. It also offers XLamp LED components and LED modules for lighting applications; and surface mount and through-hole packaged LED products for video, signage, general illumination, transportation, gaming, and specialty lighting applications. In addition, this segment provides silicon carbide (SiC) materials for RF, power switching, gemstones, and other applications. Its Power and RF Products segment offers SiC-based power products consisting of Schottky diodes, SiC metal semiconductor field-effect transistors, and SiC power modules for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies, and other applications. This segment also provides gallium nitride (GaN) high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs) for military, telecom, and other commercial applications; and custom die manufacturing services for GaN HEMTs and MMICs. Company description from FinViz.com.

Last week Cree introduced a new bulb portfolio of 25 new products. They offer better light quality, better dimming, better lifetime, better warranty and better pricing. LED lighting has finally gone mainstream.

Everybody hates to change light bulbs and the new product line has a life expectancy of 22 to 32 years. The light color has been improved and you can now dim them to as low as 1% output. The new bulbs are now guaranteed for a minimum of 10 years with a 100% satisfaction guarantee. The good news is that LED bulbs are only one of Cree's multiple product lines.

With the democratic political platform strongly green energy based and advocating products that reduce climate change, Cree should be at the top of the green list. The 60-watt replacement bulb offers the same 815 lumens of light but only consumes 9 watts of power. The downside is the cost at $12 for a 4-pack. The upside is a $135 savings in electricity over the 22.8-year life of the bulb.

Cree shares fell -4.50 to $23 when they missed earnings by a penny in August. They also lowered guidance on revenue for the current quarter. That is now behind them and shares are at a seven week high of $25.50. The last week of gains has been powered by multiple new product announcements and suggestions to buy before a Clinton presidency.

Earnings Oct 18th.

The earnings are only four weeks away so this will be a short term position to capitalize on all the "green" talk over the next several weeks.

With a CREE trade at $26.00

Buy CREE shares, currently $25.52, initial stop loss $24.50.

No options recommended because of the short time frame.



KS - KapStone Paper & Packaging - Company Profile

Comments:

No specific news. Minor decline, holding at prior resistance.

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 but only a minor decline.

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. No decline.

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.

Update 9/28/16: Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Position 9/20/16:

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



VXX - Volatility Index Futures - ETF Description

Comments:

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.



ZOES - Zoes Kitchen - Company Profile

Comments:

No specific news. New closing low.

Original Trade Description: September 27th.

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.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now