Option Investor
Newsletter

Daily Newsletter, Monday, 1/30/2017

Table of Contents

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

Market Wrap

Uncertainty Abounds

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Oh the difference a weekend makes. Trump's temporary immigration ban has sent the world into upheaval, how long it lasts is anybody's guess. Today's action saw the indices retreat from last week's all time highs but did not break the near term trend, or put an end to the Trump rally. In fact, by end of day when the dust settled much of the early losses were recouped and the trends looked as intact as ever.

Other news affecting early trading including Personal Income and Spending data, good if a little on the light side, and earnings. There were only about 40 names on today's earnings calendar, none with too high a profile, the rest of the week will be much different. There are 105 S&P 500 companies reporting,the busiest week of the season to date with reports from pharma, transportation, retail and mega-cap energy.

International markets were hit by the news but the reaction was not as intense as it could have been. Indices in Asia were led by a -0.90% decline in Australia, balanced by gains in both the Korean and mainland Chinese indices. European stocks were hit harder, falling more than a full percent in most cases to close at the lows of the day.

Market Statistics

Futures trading indicated a lower open for the indices all morning but only about -0.40%. The immigration order is to blame and may be the spark to start a major correction. However, the rhetoric and outrage already seem to be subsiding as the facts and alternative facts are disseminated so just how low this can drive the market is very questionable. The open was a little hectic, the indices fell as indicated and then fell and fell until hitting their lows just before 11AM. From that point forward the tone changed, back to bargain hunting and slow steady buying, pushing the indices back up to regain about half the days losses at the close of trading.

Economic Calendar

The Economy

There was a little more data released today than we get on a typical Monday and it was good. It wasn't perfect, not really robust, definitely not bad but consistent with long term trends and expansion of the economic recovery. Personal Income and Spending was released at 8:30, both figures rising but missing on the income side. Personal income came in at +0.3% versus an expected 0.4%, the good news is that the miss was made up in the revisions. The previous month was revised up a tenth from unchanged to +0.1%. Disposable Personal Income also increased by 0.3%. Spending rose as expected, +0.5%, with no revisions to the previous month. On the inflation side of things the PCE Prices index gained 0.2% for the month, 0.1% at the core level, and is up 1.6% YOY and 1.7% YOY ex-food&energy. The Pending Homes Sales index increased 1.6% in December, better than the 1.0% predicted by economists, led by strength in the west and the south. On a year over year basis the December figure is up 0.3%. Looking forward Lawrence Yun, economist at the NAR, says low inventory remains an issue. What houses there are available are on the high end of the scale and putting additional pressure on the market.

Moody's Survey of Business Confidence gained 0.3% in the last week as present and future outlook indicate growth. Mr. Zandi says that global business confidence is strong but cautious in some areas. Outlook for present conditions has picked up somewhat while forward outlook held steady.


Earnings season is well underway and moves into high gear this week with another 103 S&P 500 companies on the list. To date, 34% of the index has reported with 65% beating earnings estimates and 52% beating revenue estimates, both a little on the low side but near the 4 year averages. In terms of growth the blended rate for the 4th quarter is now 4.2%, up 0.8% in the last week alone, and 0.3% for the year, up a tenth.


Looking forward, estimates are on the rise and looking good. First quarter 2017 estimates have moved up more than a full percent to 12% while full year 2017 has increased by 0.2% to 11.6%. There is one red flag although not too alarming as yet; second quarter estimates fell slightly, -0.3%, and bear watching as we move forward.

The Dollar Index

The Dollar Index tried to move higher, buoyed by today's data and a miss on German inflation data, but was capped at resistance. The index created a small to medium sized pin bar that confirms resistance at the short term moving average and the $100.50 level although the indicators suggest that resistance will be tested again. Both MACD and stochastic are consistent with a shift in momentum to the upside consistent with prevailing trends. These trends were supported today by the data, data later in the week may do the same, and there is always the FOMC meeting to be wary of. The travel ban may have held the index back today, I doubt it will if the data and the FOMC are in support. Support is near $100, just below today's close, resistance is just above today's close, near $101.


The Gold Index

Gold prices edged higher on uncertainty to tickle the $1,200 level. Spot prices gained about 0.75% to trade just above $1,199. Prices may remain elevated on fear and flight to safety but the real move will be sparked by the FOMC Wednesday afternoon, possibly the NFP on Friday. A hawkish tone, strong data and enhanced rate hike expectations could send gold back down to test recent lows, near $1, 150.

The gold miners got a little lift from the rise in gold prices but not much. The gold miners ETF GDX gained only about 0.60%, creating a small doji candle, with indicators that continue to weaken. Stochastic is already indicating a pretty strong buy, consistent with the recently broken down trend, that may be confirmed by MACD in the next few days. MACD hit the zero line today, a crossover looks likely but not guaranteed. Support is just below the current level, near $22.50, at the short term moving average and the 50% retracement line. A break below here would be bearish, downside target near $20.00. A bounce would be bullish but faces resistance at or just above $24.00.


The Oil Index

Oil prices fell about -1% today as rising US rig counts, storage and production levels offset OPEC production cuts. Rig counts have been on the rise for months, last weeks was the highest in more than a year, an even forecast last year, triggered by $45 oil. Activity in the US is likely to at least hold steady if not increase so long as prices hold above $45, which in turn will add downward pressure to prices. If demand doesn't pick up to support prices OPEC may have no choice but to reopen the pumps in order to cash in while they are still high.

The energy sector took a dive today, along with the broader market, as uncertainty for the future gripped the market. The Oil Index fell nearly -2%, dropping below the near term congestion band and the 1,250 level. The indicators are both pointing lower and consistent with further downside in the near term. Today's action suggests there may be some support at 1,225 although 1,200 is a firmer target. The long term outlook is still quite bullish, so long as that doesn't change this dip will likely turn into a buying opportunity.


In The News, Story Stocks and Earnings

Sanmina Corporation, a leader in the realm of manufacturing solutions, reported earnings after the bell and the results are good. The company reported revenue above estimates and showing growth from the previous and year over year quarter. Earnings grew 75% on a GAAP basis, 30% on a non-GAAP basis and led the company to raise guidance. Guidance for 2Q 2017 is now $0.67 to $0.72, above the consensus estimate. Shares of the stock moved up to a ten year high on the news.


Tech innovator Rambus reported in line with estimates, EPS up 9% quarter to quarter and 27% year over year, as the company continues to move closer to the consumer. The company expects to return to profitability in 2017 as it looks to expand away from its core business. Forward guidance is in a range with consensus near the low end. Shares of the stock moved higher in after hours trading but remain with the 12 month range.


The VIX spiked today and may move higher. The index gained more than 17% to move above the short term moving average but met resistance at the 12.50 level. The indicators are pointing higher in the near term but remain weak at this time. A move higher is very possible with Trump fall-out hitting the market, if 12.50 is broken the next target is 15.00.


The Indices

The indices tried to sell off hard but only made a halfway decent attempt of it, recovering roughly half the day's loss before the end of the session. Today's leader was the Dow Jones Transportation Average which closed with a loss of -1.23%. The transports had been down as much as -2.8% intraday, touching support at the short term moving average, before bouncing back to recover more than half the day's losses. The index created a doji candle, confirming support, although the indicators have weakened. MACD is making a small peak and stochastic is beginning to roll over, both consistent with indications of resistance but not reversal. The index may test support again in the next day or so, a break below which would be bearish in the near term. If support is broken, near 9,250, next target for support is 9,000.


The NASDAQ Composite made the second largest decline, -0.83%, but did not fall far enough to hit the short term moving average. The tech heavy index created a small bodies black candle with long lower shadow, indicative of support, and may fall further in the next day or so. The index is still about 1.6% above the moving average, first target for firm support. The indicators are mixed and consistent with a peak or resistance within an uptrend, not so much reversal, and point to prospective entry point within an uptrend. If support is broken at the moving average next targets are near 5,500 and 5,250, -4% and -8% from the recent all time high.


The Dow Jones Industrial Average made the third largest decline today, -0.61%, edging out the broad market S&P 500 by a mere hundredth. The blue chip index created a small black bodied candle with long lower shadow, touching and confirming support at the short term moving average. The indicators slipped a hair in the nearer term but remain consistent with a trend following shift in momentum in the longer. MACD is still on track to make a zero line crossover, provided support holds, and stochastic is still moving higher so the set up looks more like the text book trend following entry than it does any form of reversal. Is support at the current level fails and the index moves lower the next targets for support are near 19,500 and 19,000.


The S&P 500 made the smallest decline today, -0.60%, and created a small doji candle. Today's candle confirms support at the short term moving average, the long term up trend line and the top of the January consolidation range. The indicators are weakly bearish and suggest support may be tested further, they are also set up to fire another trend following entry signal on the next puff of positive news to whip through the market. The long, short and near term trends are all up, and support has not yet been broken, so this looks like a buying op to me.


The market sold off today yes but it did not sell off hard and there was no commitment in it. The indices all found support intraday, they all regained a fair amount of today's losses and none came even close to doing any real damage to the technical trends. Quite the opposite is more likely, a little selling is what a good rally needs for the bulls to keep their legs and carry the market upward.

The immigration news was ill-delivered and shocking but once the facts are swallowed and digested, however unpalatable, it's just not worth the amount of outrage that was caused by it, and I think today's market action shows it. The real question is, does the issue have legs? Does it really have an impact on the market other than in the near term, will outrage continue into the short term and spill over into the economy? My guess is that it won't.

There are more important things afoot this week. There is a lot of data, starting tomorrow and ending with Friday's NFP, and that includes the FOMC meeting and policy statement on Wednesday. There is no expectation of a policy change but lots of expectation for news or hints within the statement. If they seem worried it could add momentum to today's sell off, if they endorse the economy it will likely add support. I'm still still cautious, the sell off might not be over, but I am bullish on the broad market, and now forward earnings estimates are starting to rise and my trigger finger is getting itchy.

Until then, remember the trend!

Thomas Hughes


New Plays

Drug Surprise

by Jim Brown

Click here to email Jim Brown
Editor's Note

Small companies can sometimes create novel drugs that become blockbusters. This is probably the case with Cara Therapeutics. They have come up with a substitute for opioid drugs used for pain that is not habit forming and has no side effects.



NEW BULLISH Plays

GNC - GNC Holdings - Company Profile

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. The company is developing product candidates that target the body's peripheral nervous system. Its lead product candidate includes I.V. CR845, which is in Phase III clinical trials for the treatment acute postoperative pain in adult patients, as well as completed Phase II clinical trials for the treatment of uremic pruritus disease. The company is also developing Oral CR845, which is in Phase IIa clinical trials for the treatment of moderate-to-severe acute and chronic pain; and CR701, which is in preclinical trial stage for treating neuropathic and inflammatory pain. It has licensing agreements with Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize products containing CR845 in South Korea; and Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan. Company description from FinViz.com.

This is a small company with only a $400 million market cap. However, the drug they are current testing has the potential to be a multibillion dollar blockbuster. The drug is CR845 and it treats acute and chronic pain. It does not cross the blood brain barrier to there is no euphoria that users get when they take opioid drugs. Test subjects were injected with 15 times the normal dosage reported feeling no different than when taking a placebo. There is no risk of overdose and it is not habit forming.

It does not have any of the other opioid side effects including nausea, vomiting, respiratory depression, sedation and constipation. The drug is also an anti inflammatory and long lasting. The typical dosage is 1 pill twice a day.

In hospital tests post operative use of morphine was cut almost in half. For chronic osteoarthritis the drug was more effective than controlled release oxycodone.

There are 60 million post operative patients in the U.S alone each year. There are more than 140 million prescriptions written for pain meds. This has the potential to be a blockbuster.

Cara presented at the JP Morgan Healthcare Conference in mid January and shares are taking off as investors learn about the potential for this drug.

Earnings March 9th.

Buy CARA shares, currently $14.16, initial stop loss $12.50.

No options recommended because of wide spreads and low volume.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Threatening Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 lost -1.3% for the day and bounced off critical support at 1,340. A drop below that level could trigger additional selling and start a new leg lower. The next major support point is 1,310. All the indexes were weak but the Russell was the weakest. As the market sentiment indicator this is troubling.

The biotech sector also crashed with the $BTK falling -1.6% and helping to drag down the Russell and the Nasdaq (-47).

There are no signs that the market sentiment has changed. All appearances suggest this was just a knee jerk reaction to the immigration ban but sometimes those events take on a life of their own. The Apple earnings on Tuesday evening will be the next pivotal point for the market.





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


GNC - GNC Holdings
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. Still holding the recent highs. No weakness at all.

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. No headlines on the border wall today. 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. Only a minimal rebound.

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. Only a minor 3 cent gain.

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:

Walgreens and Rite Aid announced a restructuring of their merger agreement. Walgreens said in order to satisfy the FTC they may have to sell more stores, possibly a lot more. Fred's is contractually liable to buy any stores that Walgreens or Rite Aid decide to sell. Over the long term this would be positive for Freds but over the short-term it means they would have to take on more debt and probably make another secondary offering. That should be negative for the stock price. Shares rallied at the open on the news but fell back to only an 18-cent gain at the close.

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.



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Shares were down over 50 cents at the open but rebounded to close flat. This was probably short covering on existing positions.

Original Trade Description: January 28th

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.

Position 1/30/17:

Short GNC shares @ $8.77, see portfolio graphic for stop loss.

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.



IWM - Russell 2000 ETF - ETF Profile

Comments:

The IWM came close to a support break at the open but the $133.25 level held and the ETF lost only $1.90 for the day. A break below that 133.25 level could be a banana peel for the market.

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 announced a sale-leaseback arrangement with CBL & Associates for five Sears stores and two auto stores. A sale-leaseback is where the company sells the properties to raise cash and then agrees to lease them back from the buyer for a specific term. This is another sign Sears is continuing to have a cash crunch. This transaction leaves Sears with only 204 properties that are unencumbered and could be sold for cash out of the 1,680 stores they operate. Every time they sell a property they take on debt in the form of leases and that means the amount of cash burn increases with each deal.

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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