Option Investor
Newsletter

Daily Newsletter, Saturday, 1/28/2017

Table of Contents

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

Market Wrap

Dog Catches Car

by Jim Brown

Click here to email Jim Brown

Dogs of all types have fun chasing cars but disaster can strike when they catch one.

Weekly Statistics

Friday Statistics

After six-weeks of chasing Dow 20,000, traders finally captured the prize. Just like the dog that catches a car, now they do not know what to do. I had several dogs when I was a child and two of them eventually caught cars and it was fatal each time. Let's hope the late week dormancy after investors caught 20,000 does not prove fatal as well. Volume very light on Friday with only 5.7 billion shares. The Dow traded in a very narrow roughly 31 point range after 10:AM and the S&P was locked in a four point range. What we have is a standoff. The buyers and sellers are both waiting for the other to make the first move.


The economic news was disappointing but not enough to tank the market. The GDP for Q4 came in at 1.87% growth compared to 3.5% in Q3 and forecasts for 2.4%. That 1.87% rate was just under the 1.91% average growth rate for the entire year when you add in Q1 at 0.83%, Q2 1.41% and Q3 3.5%.

Consumption contributed 1.7%, fixed investments 0.67%, inventories 1.0%, government 0.21%. Net exports subtracted -1.7%. The full year GDP was down from the 2.6% in 2015 and was the slowest growth since 2011.

The difference between Q3 and Q4 came from sales, which rose 3.0% in Q3 but only 0.9% in Q4. That emphasizes how weak the holiday shopping season really was.

It should be noted that 2017 is the 8th year in the current economic expansion and that is the second longest in the nation's history. The internet bubble of the 1990s was the longest at 10-years. The current expansion should continue for at least another year since inflation is low, global growth is rising, interest rates are low, S&P earnings are increasing and odds are good there will be some form of tax cuts that will act as additional stimulus.


Consumer sentiment rose slightly from 98.1 to 98.5 but that was the highest level since January 2004, eclipsing the 11-year high of 98.1 in January 2015. The present conditions component declined slightly from 111.9 to 111.3. The expectations component rose slightly from 89.5 to 90.3. Business expectations rose from 50% favorable to 63%. That was up from only 33% favorable in October. More than 80% of consumers said this was a good time to make major purchases.


The durable goods orders for December registered a -0.4% decline but that was far better than the -4.6% drop in November. Unfortunately, analysts were expecting a 2.6% increase. A sharp drop in defense orders was the reason for the weakness. Excluding transportation orders the headline would have been +0.5% growth and the six consecutive month without a decline. Excluding defense orders that rises to 3.8% and what would have been a good month. By themselves defense orders declined -33.4% and that skewed the entire number series. Offsetting that was a 42.2% rise in aircraft orders. Overall order growth has been very volatile over the last year.

Moody's Chart

The economic calendar for next week is headlined by the FOMC rate decision and the payroll reports. Getting lost in the noise is the ISM Manufacturing and ISM Services, which are also important.

The Fed is not expected to change rates but they will probably point to March as a potential hike. They have indicated the potential for three hikes in 2017 and as long as the market is stable they would probably rather get started sooner rather than later.

The job market is expected to have improved slightly to add 167,500 jobs compared to the 154,500 average between the ADP and Nonfarm reports in December. I am always cautious about the January report. There are a lot of temporary workers laid off in January. The seasonal adjustments are supposed to take that into account but sometimes reality rears its ugly head.

This is also the report where they do the benchmark adjustments for the prior year. That means the numbers we have been reporting can change significantly now that they actually have some data rather than just guesswork.

The ISM Manufacturing Index is expected to decline slightly. It appears analysts are unsure of the direction of activity because of the recent volatility in the regional reports.

On Monday night, the Bank of Japan meets to determine monetary policy. At the November meeting, the BOJ said it would buy an unlimited amount of Japanese government bonds (JGBs) at a fixed price with terms between 1-5 years. This was an effort to slow the rise in interest rates. Japanese rates were rising sharply on expectations for President Trump's administration to lift both growth and inflation. Now analysts are waiting to see if the bank will back off that "unlimited" authorization.


There were not many earnings on Friday but there were some market movers. General Dynamics (GD) reported a 9% increase in earnings to $2.62 compared to estimates for $2.54 per share. Revenue of $8.233 billion missed estimates for $8.258 billion. As of year-end, the company had a backlog of $59.8 billion. Shares spiked $8 on the news. Later in the day, Trump took aim at GD and Huntington Ingalls (HII) saying he was going to cut the costs of the F35 and the new submarines proposed by the Navy.


American Airlines (AAL) reported adjusted earnings of 92 cents that matched analyst estimates. Revenue of $9.79 billion narrowly beat estimates for $9.75 billion. Shares fell -5% after the company guided for higher costs in Q1 with sharp increases in fuel prices and labor costs. They predicted nonfuel costs to rise 10% to 12% compared to analyst estimates for 9%. Despite the rising costs, American authorized another $2 billion stock buyback program.


Colgate (CL) reported earnings of 75 cents that matched estimates. Revenue of $3.721 billion declined -4.5% and missed estimates for $3.844 billion. The company had increased prices 2.5% but the strong dollar removed 1.5% of sales and unit volume overseas declined by 5.5%. Shares fell 5.2% on the news.


Honeywell (HON) reported adjusted earnings of $1.74 and revenue of $9.99 billion. The company saw a -13.4% decline in Q4 because of weakness in its aerospace business. Analysts were expecting $1.74 and $10.15 billion. For the current quarter, they guided for a 1% to 2% decline in revenue because of divestitures and acquisitions. They forecast earnings growth of 1% to 3%. They did not give dollar amounts. Analysts are expecting $1.62 and $9.44 billion. Shares were volatile after the report but ended the day with a minor gain.


GoDaddy (GDDY) preannounced expected Q4 revenue of $486 million. Their prior guidance was $483-$487 million. The analyst estimate was $485 million. Shares were fractionally positive.

Gentex (GNTX) warned that 2017 revenue would be in the range of $1.78-$1.85 billion. Analysts were expecting $1.83 billion. Shares dropped about 10% at the open but recovered to close down only 2%.


AbbVie (ABBV) guided for full year earnings of $5.44 to $5.54 per share. Analysts were expecting $5.48. Shares declined -2%.

Air Products (APD) warned that earnings would be in the range of $1.30 to $1.40 and analysts were expecting $1.55. Full year guidance was $6.00 to $6.25 and consensus was $6.38. Shares fell -5% on the news.


Chevron (CVX) reported earnings of 22 cents compared to estimates for 64 cents. Earnings were not as bad as the headline suggests. There was a charge of $872 million in the quarter and removing that puts the adjusted number closer to 68 cents. Revenue of $31.497 billion missed estimates for $32.605 billion. Daily production remained almost unchanged at 2.669 million Boepd. Chevron has a lot of new production coming online over the next two years where they already spent the development money and now they are just getting everything connected and in operation. This will provide a significant boost to future earnings. The company reaffirmed its $1.08 dividend per quarter. Shares fell $2.76 on the news.


There was a flurry of tech earnings on Thursday after the bell and shares reacted on Friday. Some moved in a direction you might not have expected.

Intel warned Q1 earnings would be in the range of 51-61 cents on revenue of $14.3 to $15.3 billion. Analysts were expecting 62 cents on revenue of $14.52 billion. For the full year, Intel expects $2.66-$2.94 and $59.4 billion. Forecasts were $2.83 and $61.13 billion. You would have expected Intel shares to decline but they gained 1% for the day. Intel is facing resistance at $38.25.


Alphabet (GOOGL) reported earnings of $9.36 compared to estimates for $9.64. Revenue of $26.06 billion beat estimates for $25.26 billion. Shares fell $12 on the news.


Juniper (JNPR) reported earnings of 66 cents compared to estimates for 63 cents. Revenue of $1.39 billion beat estimates for $1.36 billion. Unfortunately, they warned Q1 earnings would be in the range of 38-44 cents and analysts were expecting 46 cents. Shares fell -4% but that was after a $2 bounce from the lows.


Microsoft (MSFT) was a big post earnings gainer. Everything appears to be going well for the company since CEO Satya Nadella took control. Their Azure cloud product is said to be in second place behind Amazon and gaining speed. Microsoft posted earnings of 84 cents that beat estimates for 79 cents. Revenue of $26.1 billion also beat estimates. The company raised guidance. Shares hit a new high and were instrumental in keeping the Dow and Nasdaq from a bigger decline. On a side note, Citigroup upgraded the company from sell to neutral. Sell? Really?


Other post earnings results include:

BDX +$4.19
VMW +$2.94
PYPL -$1.23
SBUX -$2.34
LRCX +$3.91
WYNN +$7.50

Caterpillar (CAT) warned earnings would be around $2.90 on revenue of $36-$39 billion. Analysts were expecting $3.03 on revenue of $37.87 billion. Shares gained almost 2%.


The earnings calendar for next week has a few high profile companies. Apple on Monday, MasterCard and UPS on Tuesday, Facebook on Wednesday and Amazon, Amgen, Chipotle on Thursday. There are four Dow components reporting including AAPL, XOM, MRK and Visa. After this week there will only be six Dow components left to report. Those are DIS, KO, HD, CSCO, WMT and NKE.


More than 34% of the S&P 500 companies have reported earnings. More than 65% have beaten earnings estimates but only 52% have beaten on revenue. The blended earnings growth rate for Q4 is up to 4.2% compared to the forecast of 3.1% as of December 31st. Revenue growth is now 4.7% which is slightly less than the 4.9% expectation at the end of the quarter. According to FactSet, 17 companies have issued negative guidance and 16 have issued positive guidance. Next week 103 S&P companies will report earnings. Earnings are expected to continue to increase for the rest of the year. For Q1 earnings growth is expected to be 12.8%, Q2 10.3% and for all of 2017 11.6% growth.

The party is nearly over for Sears (SHLD). Shares were down -22% for the week and the outlook is not good. They confirmed late Friday they had laid off a significant number of full time workers across all 800 of their stores. They are not laying off temporary help. They are cutting full time workers that have been there for a long time. These are the high dollar salaried positions with benefits. They laid off assistant managers, department managers, backroom managers and pricing managers. Message boards for Sears workers claim the stores only have a skeleton crew left and too few workers to actually operate the stores.

Merchandise is not even being unpacked. They have removed the shelves in many stores and they are just setting pallets of merchandise in the isles. These are pictures of a Kmart store taken by an employee and given to Business Insider.



Sears reported a -12% decline in same store sales over the holiday shopping season. Moody's and Fitch Ratings both downgraded Sears to a lower level of junk last week saying the $1.8 billion cash burn for 2017 is likely to force a default event. Most analysts believe bankruptcy is inevitable.


Crude prices continue to hover in the $52-$54 range thanks to a constant stream of headlines from OPEC about how successful the production cuts have been. Now that January is nearly over, we will begin to get the actual production data and be able to judge those headlines for ourselves. Most analysts believe oil prices will move lower before they move higher.


The active rig count is exploding. After adding 35 rigs the prior week, the U.S. added another 18 last week. Production of 8.96 million bpd is nearing the 9 million mark but still down from the 9.61 mbpd on June 5th of 2015. With this accelerated rig activation and oil prices holding over $50 we could see a new production high by the end of 2017. Producers are ramping up completions of previously drilled but uncompleted wells. The IEA said as of September there were 4,117 unfracked wells. This is the low hanging fruit for producers as they attempt to ramp up production. When prices were low, producers would drill the wells to secure the acreage but then remove the rig and not spend the additional money to complete them and turn on the production. Since the hard part is already done, they can put them on production fairly quickly. The frackers are going to be very busy over the coming months.


 


 

Markets

Happy New Year! Saturday kicks off the 15-day Spring Festival in China that follows the Lunar New Year. From the low volume on Friday, you would have thought it was New Years Eve in the USA.

I really think we are suffering from that dog/car analogy I mentioned earlier. Investors have been focused on the Dow 20,000 level for the last six weeks and now that it has been broken, nobody knows what to do. There is no higher target. People are talking about 23,000 but that is too far away to energize traders today. If we did get a corporate tax cut to 15%, we could get there in a hurry on earnings growth alone, but nobody really expects that to happen in the near future or to actually be 15%. We are probably a couple months away from the appearance of an actual tax-restructuring package and a couple more months at least before all the smoke clears from the political war that will develop. In reality, nothing is likely to actually happen to the rates until 2018. The prospect of a tax cut is the main driver of the market today and investors may be coming to the realization that it is a long way off.

The sellers have no conviction. Buyers are not chasing prices but they are buying the dips. The fact we have not seen any "material" dip is bullish but just like thunderstorms in the summer, we know there will be one eventually.

The very low intraday ranges on the Dow and S&P have pushed the Volatility Index to 30-month lows. Actually, it is less than a point from 24-year lows. We know from experience that volatility will not stay at this level and once it reverses, it can move very rapidly. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The weekly chart is to show the prior low and it does not show the rebounds as clearly since they are all squeezed together. Over the last ten years, there have been a lot of volatility events. The daily chart shows the events about every 2-3 months. It has been three-months since we had one.



If there is a target after Dow 20K, it is S&P 2,300. When the index neared that level on Wednesday there was a dead stop. The high for the day was 2,299.55. Thursday's high was 2,300.99 and Friday's high was 2,299.02. There is strong resistance at that level and that may be the next threshold to watch. The S&P has short-term risk back to 2,260 and longer-term risk to 2,230.


On the Dow, the winners offset the sinners and the index closed only fractionally lower on Friday. Gains from CAT, JNJ and MSFT offset the losses in GS and CVX. With only four Dow components reporting earnings this week, we are not likely to see the single stock volatility except for Apple on Wednesday. They report after the close on Tuesday so the reaction will be on Wednesday. The other three stocks, XOM, V, MRK are not normally market movers.

The Dow has short-term risk back to 19,750 which is just a little more than a 300-point decline. Unless market sentiment changes significantly, I do not see that level breaking but anything is always possible.



The Nasdaq big caps have caught fire and the Nasdaq 100 is in rocket mode. The next measurable resistance is well above at 5,500 but I seriously doubt we will get there without a couple pauses to consolidate and take profits. The index is up nearly 10% since the election. Most years do not gain 10%. You can see from the recent spike it is totally unsupported but that does not mean it cannot go higher.


The Nasdaq Composite is not as overheated as the Nasdaq 100. The index broke over uptrend resistance on Wednesday and is using that as support. The biotech index actually posted a decent gain on Friday and that helped push the composite index higher.

With the majority of the Nasdaq big caps already reported, we are facing a couple weeks of post earnings depression in those stocks. Apple, Facebook and Amazon are the last three majors to report this week and then we could see a period of restructuring where traders leave the stocks that have reported and look for something else that is making a move.

Support on the composite index is still 5,530.



The Russell 2000 is the straggler. It has failed to break through or even test the prior resistance highs at 1,390 and fell back on Friday below prior short-term resistance at 1,375. The Russell benefitted from the two-day short squeeze but there was no follow through. If the Russell drifts back below 1,350 we could see it lead the big cap indexes lower.


It is hard to pick a direction for next week. The complete lack of sellers and the quick buying on the dips is keeping them shallow. This would suggest we are still in a bullish mode. Technically, we are still overextended but nobody seems to care. We need to remain in trend following mode. We follow the trend until it ends. We will know that it ended when the dips begin to make lower lows. I would definitely maintain your stops as the earnings cycle plays out. Once the cycle starts to fade, the market typically fades with it as the post earnings depression takes hold.



Random Thoughts


I am shocked that the bullish sentiment declined after the Dow broke through 20K on Wednesday and the top four indexes all set new highs. That should have caused a flood of bullish sentiment. However, as I mentioned earlier, once a target is hit, there is nothing left to aim at and traders lose interest. Note that they did not shift to bearish but to neutral.

Last week results


News broke this weekend that North Korea had restarted a nuclear reactor that produces plutonium that can be used for weapons. The reactor had been dormant since 2015 as the spent fuel rods were removed for reprocessing to produce that plutonium. Washington's 38 North Korea monitoring project said the country had enough uranium and plutonium to produce about 20 bombs at the end of 2016. They are expected to test a new ICBM any day now that NK claims could reach the USA. This will be a new problem for President Trump. He has said these NK events will not happen on his watch. It will be interesting to see what he does about it. Secretary of Defense Mattis is scheduled to visit Japan and South Korea next week so shared concerns about NK will be the topic of conversation.


The Dow broke 20,000. Check. However, it took 28 days for the index to move from 19,900 to 20,000. That is the longest amount of time for the last 100 points in any of the prior 1,000 point moves since 10,000. It only took the Dow 64 days to move from 19,000 to 20,000. That is the second fastest 1,000 point gain in Dow history.

There was significant resistance to that big round number at 20K and it may not be gone. The short squeeze on Tue/Wed simply overcame the existing sellers but it may not have erased the overall resistance to this new level. Next week will be interesting.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A correction takes place to determine which investments are the tennis balls and which are the eggs. You want to own the things that bounce, as in tennis balls, and not the eggs."

William Berger


 



New Plays

Ugly Chart

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes companies just cannot get it right and miss over and over on earnings. GNC has a chart that even a mother could not love. Shares are fown from $35 to $9 over the last three quarters and still falling.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

GNC - GNC Holdings - Company Profile

GNC Holdings, Inc., together with its subsidiaries, operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Sell short GNC shares, currently $8.83, initial stop loss $9.55

No options recommended because of the distance from the stock price. However, the Feb $7.50 put is only 25 cents. That might be an interesting lottery play to hold over their earnings report. If they get slammed on earnings again that could be a winner.




In Play Updates and Reviews

Consolidation?

by Jim Brown

Click here to email Jim Brown

Editors Note:

After two days of low volume and minimal ranges we have to decide if this is consolidation or preparation. Since there are no sellers, it appears to be consolidation. The other option is preparation for another change in direction and I am not seeing that today. The Nasdaq closed at a new high. The Dow and S&P traded in very narrow ranges with the Dow's range only 31 points after 10:AM.

Volatility shrank again with the VIX closing at another two-year low at 10.58. When the VIX is high it is time to buy, when the VIX is low it is time to go. The VIX can stay low for sometime but when it reverses from these lows the rebound can be dramatic.





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


CONN - Conn's Inc
The short 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 gain but at least a gain.

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. Trump and the Mexican President made nice with an hour-long phone call Friday morning. Still holding at the 52-week high.

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

CONN - Conn's Inc - Company Profile

Comments:

No specific news. The position was entered at the open and we saw a -3% decline for the day.

Original Trade Description: January 26th

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.

Position 1/27/17:

Short CONN shares @ $10.50, see portfolio graphic for stop loss.

No options because of wide spreads and no open interest.



ENDP - Endo International - Company Profile

Comments:

No specific news. Shares dipped -2% and are heading towards new lows.

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.

Update 1/26/17: 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.

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:

No specific news. Shares were volatile at the 2:PM with a big spike and big decline of more than $2 in the spread. They lost -2.3% for the day.

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.

Update 1/26/17: 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.

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 lost 5 points for the day to break support at 1,375 and close near the lows. Small caps were the biggest losers for the day with the S&P-600 down -0.4%.

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:

Sears declined another 7% after confirming they had laid off a large number of workers across all 800 stores. They laid off full time workers, primarily assistant managers, department managers, backroom managers and pricing managers. Message boards for Sears workers claim the stores only have a skeleton crew left and too few workers to actually operate the stores.

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.

Update 1/26/17: 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.

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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