Option Investor
Newsletter

Daily Newsletter, Thursday, 1/26/2017

Table of Contents

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

Market Wrap

New All Time Highs

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The broad market pulled back slightly from new all time closing highs, but not before setting new intra-day all time highs. Today's action was not the follow through we'd like to see in a really strong rally but may be the next best thing; a cool, calm consolidation at new all time highs.

The morning started with global markets in rally mode. Asian and European indices were moving higher and setting new long term highs in both regions. Asia was strongest, both China and Japan gaining more than 1.25%, Japan rising more than 1.75%. Europe was stronger in the early portion of the session but pared gains to just above break-even on the open of the US market.

Market Statistics

Futures trading was positive all morning but not strong. The indices were indicated to open with gains of only a few points and this held for most of the morning. There was quite a bit of earnings and little bit of data to move early trading but none did more than cause a mild ripple on the charts. The open was orderly if a bit choppy, the indices opened with marginal gains and then trend sideways from there for the first half of the day. At noon the indices were near the lows of the session, just below break-even for the S&P 500, and then shortly thereafter falling to new lows. The SPX hit its intraday low just after 1:30PM, about -5 points, and bounced from there, moving higher over the next hour to regain all of the losses. Late afternoon saw the indices continue to churn within the earlier ranges and close near the midpoint of the day.

Economic Calendar

The Economy

Today's economic calendar included Trade Balance, New Home Sales and Leading Indicators along with the weekly jobless claims. Claims rose by 22,000, from last week's surprise drop, to hit 259,000. Last week's figure was revised higher by 3,000. The four week moving average of claims fell by -2,000 to hit 245,500, a new low dating back to November of 1973. On a not adjusted basis claims fell by -19.9% versus an expected decline of -26.9% and are down -5.2% year-over-year. The largest increase in claims was California, +16,984, the largest decline in claims was in New York, -22,100. This week's increase is not too surprising given last week's large drop and a sign of post-holiday seasonal volatility.


Continuing claims rose by 41,000 on top of last week's upward revision to hit 2.100 million. The four week moving average fell by -1,250 to hit 2.92 million. This figure remains near recently set long term lows and consistent with long term labor market health.

The total number of Americans on unemployment rose by 54,418 to hit 2.561 million. This is likely the peak, based on seasonal trends, and should begin to fall off next week. On a year over year basis this week's figure is -6.1% below this same time last year and consistent with long term improvements in the labor market. Looking forward we can expect to see total claims figures fall off into the spring with a target near 1.88 million. Simply based on the pledged new jobs we've been hearing about lately I would expect to see the spring hiring season come in on the strong side.


New Homes Sales fell a surprising -10.4% in December from November and are down -0.4% from last December. The market had been expecting sales to remain flat. Despite the miss full year 2016 new homes sales grew 12.2% over 2015 and are expected to continue growing into 2017.

The Index of Leading Indicators rose by 0.5% in December after rising 0.2% in October and 0.1% in November. The Coincident and Lagging Indices both rose as well, by 0.3% each.According to economist at the Conference Board the index is indicating continued growth in 2017, and the possibility of that growth expanding in the 1st half, perhaps as early as the 1st quarter. The biggest contributor to this month's gains are an increase in forward outlook.


Tomorrow's data includes the first read on 4th quarter GDP, durable goods and Michigan Sentiment.

The Dollar Index

The Dollar Index has begun to rebound from support levels. The index gained nearly 1% intraday, rising up from the $100 level, but gains were capped at the $100.50 level and previous long term high. Today's move is in response to economic data and forward outlook; the US economy remains on track for growth, rising interest rates and a stronger dollar while global economies remain in QE mode. The indicators remain weak, consistent with a test of support within an uptrend, but not yet supportive of higher prices. The index may remain at/near current levels over the next week as economic data is released and up to the release of the FOMC statement next Wednesday. A move higher faces resistance at $100.50, $102.50 and $103.50. A break below support would have a target of $98.65 in the near term.


The Gold Index

Spot gold fell another -0.75% today, extending a drop from resistance levels, to trade below $1190 and at a two week low. This move is driven by the dollar's bounce from support and a decline in safe haven flows although today's spat between President's Trump and Nieto may renew those flows. To be brief, President Nieto canceled his trip to the US saying Mexico won't pay for a wall while Trump says the cancellation was mutual. More on that story to come. Getting back to gold, now that is below $1200 with stronger dollar in the forecast it will come down to the FOMC. A hawkish Fed will mean a stronger dollar and weaker gold, a dovish Fed the opposite.

The gold miners fell in today's session and look poised to move lower. The Gold Miners ETF GDX fell -2.5% to trade just above support with increasingly bearish indications. Both MACD and stochastic are consistent with a trend following sell signal; stochastic has already confirmed, MACD is very close. Support is near $22.50, coincident with the short term moving average and the 50% retracement level that has provided support and resistance in the past. A break below these levels would be additional confirmation of a trend following sell with downside target near $20. Depending of course on the FOMC and the dollar.


The Oil Index

Oil prices rebound today, WTI gaining more than 2% at the close of trading. Despite the gains oil prices remain trapped in a near term trading range driven by OPEC cuts and rising US production. This week's news includes further sign of OPEC's commitment to production cuts and signs those cuts are digging into supply counterbalanced by rising US rig counts and oil storage levels. I expect this tug of war to go on into the near to short term.

The Oil Index fell despite the rebound in oil prices, shedding about -0.25%. Although counter to the move in oil the move in the index has a bullish undertone, testing support at the short term moving average following a trend following bounce from strong, longer term support. The indicators are promising, stochastic is firing a strong buy signal and MACD is close to confirming, so I expect to see it move up to test the top of the near term range at least. Longer term, earnings outlook remains robust and 2017 year end oil prices are expected to be higher so I am bullish on this sector. A break above 1,300 would have targets near 1,350 and 1,400.


In The News, Story Stocks and Earnings

There was quite a bit of earnings news before the bell and the results are about as expected, mixed with a positive overtone. There were some notable misses, on revenue earnings and guidance, but just as may beats or upgrades so nothing really has changed, we're still in a stock picking sector rotational kind of environment.

Caterpillar reported EPS that beat expectations smartly but were only flat compared to last year. This comes on a decline in revenue that was worse than expected. The company blames weak global economic conditions and provided weakened guidance although it does not include the possibility that Trumponomics will actually spur the US and global economy to growth. In regard to that company CEO said that the Trump outlook was promising but any benefits would likely not be realized by them until next year. Guidance was reported as being lowered but what really happened was the range was widened around the current mid-point, allowing for the possibility of better or worse results than previously expected. Shares of the stock fell more than -1% after setting a new intraday 2 year high.


Ford reported 4th quarter and full year results that were a little better than expected and the 2nd best in company history. EPS met estimates and revenue was a little strong. Guidance for 2017 is a little on the weak side, full year pre-tax profit is expected to hold flat with EPS down on expected investment in global infrastructure. Shares of the stock fell more than -3% on the news.


Royal Caribbean beat EPS, missed on revenue and raised full year guidance. Company CEO says that bookings are stronger than ever, guests are booking earlier and earlier and at higher prices. Shares of the stock jumped 10% on the news and is one of 58 S&P 500 companies making new highs today.


After hours action was all about tech, and coffee, as earnings from some of the biggest names in the industry hit the market.

Google - Earnings miss but revenue beat, shares of the stock fell -2.5% but regained some of the loss before the afterhour session came to a close.

Microsoft - Beat on the top and bottom lines on strong demand, shares rise to new all time highs on positive forward guidance.

Intel - Beat on the top and bottom line but full year 2017 guidance was little light. The company expects to see full year EPS in a range of $2.66 to $2.94, consensus is $2.83. Shares fell nearly -1.0% on the news.

Paypal - Revenue and earnings were in line with expectations, guidance was in line with expectations. Shares of the stock fell -2.25% on the news.

The Indices

The indices held almost exactly flat for the day, where was up a hair another was down a fraction. Regardless of closing positive or negative for the day all the indices set new intraday all time highs. The leader was the Dow Jones Transportation Average with a gain of 0.51%. The transports made a medium sized white bodied candle, the third in a move up to test all time highs, and set a new all time intraday high by about a dozen points. Today's move is trend following and supported by the indicators. Both MACD and stochastic are firing trend following entry signals and both have plenty of room to move higher.


The Dow Jones Industrial Average also posted a gain, 0.16%, and set new all time closing and intraday highs. The index is setting new all time highs, in line with near, short and long term trends, and supported by the indicators. Stochastic firing an early entry signal and MACD will likely confirm with a zero line crossover tomorrow. Upside target is 20,500 in the near term with additional targets in the short to long term.


The NASDAQ Composite posted the smallest loss, -0.02%, and created a very small spinning top. The tech heavy index, despite making a black bodied candle, set a new all time intraday high in line with the prevailing trends. The indicators have both confirmed the new highs with trend following bullish crossovers and support higher prices. Upside targets are near 5,750 in the near term.


The S&P 500 made the largest decline but still only -0.07%. The broad market was able to set a new intraday high despite posting a loss and looks like it will go higher. The indicators are both firing trend following bullish crossovers, MACD confirming today, and support the idea of higher prices. Upside targets are now 2,350 in the near term with additional targets in the short to long.


At the risk of jinxing the whole thing I have to say I am pretty pleased with the way things are setting up. The indices are breaking out to new highs, the indicators are confirming with technical trend following buy signals, economic trends and outlook are positive, earnings trends and outlook are positive and the whole thing is being turbocharged by the idea of tax reform, improved trade agreements and job creating Trumponomic outlook. With all this behind it I just don't see any reason to be bearish, and no reason to be selling. I still advise caution, better to be safe than sorry, but I think the bull market is back and getting ready to stampede.

Until then, remember the trend!

Thomas Hughes


New Plays

Retail Funk

by Jim Brown

Click here to email Jim Brown
Editor's Note

Hardly a day goes by that some retailer does not report lower sales and the sector outlook is bleak. With malls dying and retailers announcing store closings almost every week, it is clear Amazon is killing the brick and mortar retailers.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

CONN - Conn's Inc - Company Profile

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 7th.

I believe Conn's will continue lower. Shares broke to a two month low on Thursday when support at $10.75 failed.

Sell short CONN shares, currently $10.50, initial stop loss $11.55

No options because of wide spreads and no open interest.




In Play Updates and Reviews

Stutter Step?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small caps barely participated in the rally over the prior two days and were weakest on Thursday. The Russell did rebound on the short covering on Tue/Wed but the gains were less. The index declined immediately after the open today but the -7 point decline was not material. The Russell came to rest right on prior resistance at 1,375, which should now be support.

There were a bunch of big name tech earnings after the close and Microsoft was the only company that moved higher in afterhours trading. Futures initially declined -3 points but have recovered to only a fractional decline.

It will be interesting to see how the market trades on Friday with the majority of the big cap earnings now behind us. Was today's decline just a stutter step in the move higher or the start of some profit taking?





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


CX - Cemex SAB
The long stock position was entered at the open.



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BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Only a minor decline from Wednesday high close.

Original Trade Description: January 21st.

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.

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.



CX - Cemex - Company Profile

Comments:

No specific news. Minor decline from the 52-week high on Wednesday.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Earnings Feb 9th.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Long CX shares @ $9.42, no initial stop loss.

Optional: Long July $11 call @ 52 cents. No initial stop loss.




BEARISH Play Updates

ENDP - Endo International - Company Profile

Comments:

Endo announced 90 jobs cuts as part of a restructuring effort to save $40-$50 million a year. The company said it would take a charge of up to $20 million on the terminations. Those must have been some very highly paid people. Endo employs 6,400 so these layoffs are minimal. Shares rose 10 cents on the news.

Original Trade Description: January 14th

Endo International plc develops, manufactures, and distributes pharmaceutical products and devices worldwide. Its U.S. Branded Pharmaceuticals segment offers chronic pain management products, such as BELBUCA, OPANA ER, and Percocet; Lidoderm for opioid analgesics; and Voltaren gel for osteoarthritis pain, as well as XIAFLEX for treating Peyronie's and Dupuytren's contracture diseases. This segment also provides Supprelin LA for central precocious puberty treatment; testosterone replacement therapies, such as Aveed and TESTOPEL, as well as Fortesta and Testim gels; Frova and Sumavel DosePro for migraine headaches; Valstar, a sterile solution for intravesical instillation of valrubicin; and Vantas for the palliative treatment of prostate cancer. The company's U.S. Generic Pharmaceuticals segment provides tablets, capsules, powders, injectables, liquids, nasal sprays, ophthalmics, and transdermal patches for pain management, urology, central nervous system disorders, immunosuppression, oncology, women's health, and cardiovascular disease markets. Its International Pharmaceuticals segment offers specialty pharmaceutical products in various therapeutic areas, including attention deficit hyperactivity disorder, pain, women's health, and oncology; generic, branded generic, and over-the-counter products in the areas of dermatology and anti-infectives; injectables for the treatment of pain, anti-infectives, cardiovascular, and other therapeutics areas; and healthcare services, products, and solutions to hospitals, pharmacies, and practitioners, as well as for government healthcare programs. The company also provides Monarc subfascial hammock to treat female stress urinary incontinence; and Elevate transvaginal pelvic floor repair system for the treatment of pelvic organ prolapse. It sells its branded pharmaceuticals and generics directly, as well as through wholesale drug distributors. Company description from FinViz.com.

Endo is a small $3 billion market cap company but they have been around since 1920. They are headquartered in Dublin Ireland and could easily be impacted by an import tax. They do have some common products and they do have earnings.

Endo has been benefitting from raising drug prices and a study underway to determine how much companies have raised prices over the last ten years is bound to highlight Endo as a serial hiker. The company already warned that the pricing environment was going to remain challenging in 2017 with 30% year over year declines in generics. If the new replacement for Obamacare does require bidding for generic drugs as Trump has mentioned, Endo could be under a lot of pressure. Add in the import taxes and it could be ugly. Investors are anticipating these events and the stock is falling.

On Thursday somebody bought 4,000 February $12.50 put for 70 cents. That is a $280,000 bet they are going lower. If Trump repeats his desire for lower drug prices in the inauguration speech, the drugs companies are going to collapse again.

Earnings February 7th.

Position 1/17/17:

Short ENDP shares @ $13.22, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



FRED - Freds Inc - Company Profile

Comments:

The Walgreen's CEO said the company remains "actively in discussions" with Rite Aid about the regulatory concerns. We are discussing "all the instruments and actions we can put in place to facilitate this process." The merger agreement is set to expire on Friday and he did not say whether it would be extended.

Original Trade Description: January 23rd.

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 30, 2016, the company operated 641 company-owned stores, which included 60 express stores in 15 states and 18 franchised stores under the Fred's name, as well as 372 pharmacies and 3 specialty pharmacy facilities primarily in the southeastern United States. It also operates 18 franchised stores under the Fred's name. Company description from FinViz.com.

Freds has been in retail trouble for over a year. Their same store sales continue to decline since every grocery store, Walmart and Target in America has added a pharmacy. Shares had been in decline until Walgreens/Rite Aid agreed to sell Fred's 865 Rite Aid stores in an effort to get FTC approval for the WBA/RAD merger. That would make Fred's the third largest drugstore chain in the U.S. and shares doubled on the news.

A funny thing happened on the way to the merger. The FTC said last week they did not believe that was enough of a consideration to approve the merger. Walgreens has 8,200 stores and Rite Aid has 5,000 stores. Selling Fred's 865 Rite Aid stores was not enough. The combined WBA/RAD would have more than 12,500 stores to Fred's 1,500. CVS would become number two at 9,655 stores. The FTC believes the post merger environment would create two heavyweights that would dominate their respective areas.

Shares of Fred's have been in decline for a week on the worry the FTC will either block the merger OR they will be forced to sell a much larger block of WBA/RAD stores to Fred's and the company will not be able to complete the transaction or they will become too big too fast and begin losing money like crazy as they try to ramp up distribution and management to handle the suddenly increased store count.

Fred's announced a secondary offering on Friday to raise money for the acquisition. If the deal changes that causes additional problems. If the deal were to triple in size, Fred's would have to do another secondary to raise the additional cash and it could be a whopper of an offering.

Earnings March 9th.

I believe Fred's will continue to give back those monster gains from the December headline. If the WAG/RAD merger approval gets extended that creates more indecision for Fred's.

Position 1/24/17:

Short FRED shares @ $14.97, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The Russell 2000 gained +2 points right at the open and that was the high for the day. The index immediately sold off to close at the lows back at 1,375, which was prior resistance.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

Moody's joined Fitch in another downgrade on Sears credit instruments. The debt instruments were cut from Caa2 to Caa3 because of accelerating cash burn and declining asset base. The WSJ had another article today negative on the outlook for Sears. Sales at companies like Mattel and Hasbro declined sharply in Q3 suggesting Sears and others did not reorder and earnings could be dismal.

Original Trade Description: January 9th

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 October 31, 2015, this segment operated approximately 952 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 October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Update 1/19/17: Sears announced it was ending its decades old employee discount program. They are going to allow employees to earn points on purchases that will be good for future discounts. Currently they get a discount on items at the time of purchase. By scrapping that plan, the company gets the money up front and maybe the employee will use their points on future purchases. The point values differ on different types of merchandise. If Sears eventually files bankruptcy, the points would disappear. This is another sign the company is in trouble.

Update 1/21/17: Moody's downgraded Sears credit rating from Caa1 to Caa2. Moody's said Sears is running out of stuff it can sell for cash. They only have 211 properties that are unencumbered and worth about $2.5 billion. With the company burning cash at the rate of $1.5 billion they are rapidly approaching the end of the line. Moody's said they could raise cash with the sale of the Kenmore and Diehard brands but after that they are done. There is nothing left to sell that will produce a large inflow of cash.

Update 1/25/17: Fitch Ratings took another look at Sears and reiterated they expect a $1.6 billion cash burn for 2016 and $1.8 billion in 2017. The Barron's laid out the problems ahead for Sears and that tanked the stock on Wednesday.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.




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