Option Investor
Newsletter

Daily Newsletter, Thursday, 2/2/2017

Table of Contents

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

Market Wrap

Resilient Market

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Another day of uncertainty, another day with the market hanging out near the latest all-time highs. Today's economic data was decent but not stellar, the round of earnings more of the same; not awesome but not bad, when one company misses estimate another beats.

International markets fell in the over night session although losses were minimal. In Asia losses were led by the Nikkei, -1.22%, pressured lower by a steadily appreciating yen. In Europe early losses were trimmed to near break-even levels as earnings and economic data lifted sentiment. Trading was led by England, the FTSE rising 0.47% after the BOE held rates steady and raised their growth outlook. The bank now sees 2017 UK growth in the range of 2.0%, up from 1.4% target issued last August, and the 2nd upgrade since the Brexit referendum.

Market Statistics

Futures trading indicated a negative open all morning. In early trading the S&P was indicated to open close to 10 points below yesterday's close but that moderated to only about -5 points after the data and earnings dump. The open itself was a little hectic, the indices opened with small losses as indicated and made a push lower in the first few minutes of the open session. The good news is that support kicked in within the first 10 minutes of trading and sent the indices back to break-even, where they hovered the rest of the day. The SPX specifically was able to bob above and below the break-even level a minimum of 5 times before 2PM, and then a few more times after that, closing with little movement to show for the day.

Economic Calendar

The Economy

The Challenger, Gray&Christmas report on planned layoff's jumped 37% in January. The number of planned layoff's came in at 45,934, an increase from the previous month but down -39% from January of last year. The retail sector led, accounting for 49% of the monthly total, as brick&mortar operations suffer from the impacts of online shopping. On a year over year basis the number of retail layoff's in January was nearly unchanged from last year so it doesn't look like issues within the sector are worsening, just persisting. Looking at the chart it is clear that the trend in job cuts over the past year is down, consistent with strengthening within the labor market.


Initial claims for unemployment fell -14,000 to hit 246,000. Last week's figure was revised higher by 1,000 and the 4 week moving average increased by 2,250. On a not adjusted basis claims fell -1.1% versus an expected gain of 4.9% and are down -10.6% over last year. On an adjusted basis we've now had claims below 300K for more than 100 weeks, very nearly the longest trend on record. Looking at the chart is appears as if the adjusted figure is stabilizing around the 250K level, very near the long term low and at a level consistent with ongoing labor market health.


Continuing claims fell -39,000 to hit 2.064 million, last week's number was revised higher by 3,000. The four week moving average also fell, shedding -13,000, and is moving back toward its long term low. Regardless, continuing claims are trending near long term lows and consistent with ongoing labor market health.

The total number of claims fell by -55,817, in line with expectations and consistent with seasonal trends. Now that the total claims figure has crested its peak we can expect it to continue lower over the next 22-23 weeks. In terms of the long term trends and labor market health? This figure is consistent with long term improvement and ongoing labor market health. Considering yesterday's ADP, 240,000 and well above expectations, along with today's data and the trends I would expect to see tomorrow's NFP come in at or above 200K with a drop in the unemployment rate, a possible increase in participation and a rise in average hourly earnings.


The first read on 4th quarter productivity and unit labor costs were both expansionary and better than expected. Productivity increased at an annualized rate of 1.3% in the 4th quarter, consensus expectation was 1.0%, driven by an increase in output offset by an increase in hours worked. Output increased 2.2%, outpacing hours worked by more than 1.25%, which in turn helped to keep unit labor costs below expectations. On a year over year basis 4th quarter productivity is up 1.0% from 2015, led by a 2.2% increase in output and offset by a 1.1% increase in hours worked.

Unit labor costs rose by 1.7%, slightly less than the consensus 1.9%. This represents a 3% increase in wages offset by the 1.3% increase in productivity. The take-away is that wages are on the rise, 3% is a strong number, but is not having an overly negative effect on labor cost. Full year labor costs rose by 1.9%, well below the 2.9% YOY increase in average hourly reported with the last NFP release. Based on these figures it looks like the consumer is improving at a pace greater than inflation.


The Dollar Index

The dollar fell in today's action on an absolute lack of FOMC engagement. Yesterday's policy statement was the most vanilla, uninformative bland statement I've seen in years. They took no stand, gave no insight and created no waves begging a couple of questions from my inner conspiracy theorist. The first of which is, is the FOMC looking at the same data I am because I see a growing chance they will fall behind the curve, a situation that will lead to surprise interest rate hikes, a faster rate of increase and the possibility of larger increases than expected. The second is this, are they getting political? Or maybe trying to avoid the All Seeing Eye of Trump by not making waves? He's said a strong dollar isn't always that great, maybe they took it to heart, their lack of action certainly caused the dollar to fall and isn't likely to add much support.

Near term, the dollar is under pressure from Trump comments and an apparently dovish Fed. Longer term the data supports improving economic conditions, rising inflation and normalized rates. The dollar may continue to fall, but I think when it hits bottom the bounce could be huge (imagine a surprise rate hike, and one bigger than a mere 25 basis points). Today the Dollar Index fell about a half percent but bounced off the intraday low a 10 week low, to close with a small gain on the day. The indicators remain bearish but continue to diverge from the low which makes the move lower appear weak and extended. Next target for support is near 98.65, resistance is now back at the 100.50 level.


The Gold Index

Gold prices got a lift today from Fed dovishness and a stronger dollar. The caveat is that gains were capped at resistance on strengthening economic outlook. Spot gold gained nearly a full percent in today' session to trade above $1,215 but gains were capped at the $1,220 level. A break above this level would be bullish and could take it up to $1,250, the caveat is that tomorrow's NFP could reassert bullish outlook for the US economy and the dollar.

The Gold Miners ETF GDX gained just over 2%, gapping up at the open, but price action held within a very narrow range. Today's candle is a very small spinning top appearing exactly at the 38.2% retracement level and within yesterday's long upper shadow. The ETF continues to drift upward on strength in gold but the indicators persist in weakness. Both MACD and stochastic are showing wicked divergence suggesting a market on increasingly shaky footing. Resistance is at today's close, near $24.50, a break above could be bullish but I'd be careful, gold and the miners can only go so high on Trump driven flight to safety and Fed indecision.


The Oil Index

Oil prices were choppy today, up a half percent and down a half percent as OPEC production cuts and rising US output vie for dominance of the market. OPEC has managed to lift and support prices above $50, US production has prevented further advance and all while demand outlook holds steady. Where this tug of war ends is yet to be seen, at this time the market remains skewed toward over-supply so prices are likely to remain under pressure.

The Oil Index held steady in today's action, just off yesterday's low, posting a small gain for the day. Action was supported by results from ConnocoPhillips which reported a smaller than expected loss, better than expected production and the expectation to meet 2017 goals. The indicators are bearish with a renewed surge in downside momentum so the index may drop down to next support, near 1,200, although forward outlook remains positive. Longer term, earnings growth is still expected to be robust this year and oil prices are still expected to hold above $50 so I am bullish and looking to buy on the dip.


In The News, Story Stocks and Earnings

It was a busy day for earnings, both before and after the bell. There were quite a few big names before the bell, like International Paper, but there more after the bell. International Paper is one that beat on both the top and bottom line in the 4th quarter, growing EPS by roughly 25%, although full year results were down slightly from the previous. The company's CEO said in the release that they are entering 2017 with improving economic conditions and several catalysts expected to enhance earnings, a statement that sounded good but did not cheer investors. Despite the beat and positive outlook shares of the stock fell more than -6% in a retreat to recent support levels.


Amgen beat EPS estimates by a dime but provided weak guidance for the upcoming year. The interesting news was positive results with one of their drugs that helped to lift shares more than 1%in after hours trading.

Amazon beat EPS estimates as well, but missed on revenue and reported some weak statistics for some of its largest divisions. The good news is that the company reported another quarter of profitability, the bad news is that forward guidance is weak. Shares fell nearly -4% in after hours trading.


GoPro reported earnings above estimates on weaker than expected revenue. The company also gave weak forward guidance, -20% below consensue, resulting in a -10% drop in after hours trading.

Chipotle Mexican Grill was also not able to deliver positive results. The fast casual burrito pusher missed on both the top and bottom lines as comp sales plunge -4.8%. Shares fell nearly that much in the after hours session.


The Indices

The indices held heir ground today in a choppy session. In most cases it was a real crap shoot whether or not the individual indices would close in the red or the green, except in the case of the Dow Jones Transportation Average. The transports held within a tight range today, creating a small doji spinning top, but made the largest move with a decline near -0.70%. The index has fallen below the short term moving average and retreat to support levels which has left it looking like a double top reversal could be at hand. The neckline would be current support, near 9,000, that if broken could lead to a correction in the range of -5% to -10%. The indicators have rolled over into a bearish signal, consistent with the drop from resistance, but have yet confirm any form of reversal; they are at worst indicative of ranging at this time.


The next largest move was made by the NASDAQ Composite, a decline of -0.11%. The tech heavy index created a small spinning top doji just below the current and recently set all time high in a move that looks like nothing more than simple consolidation. The indicators are moving lower in the nearer term but remain bullish in the longer, consistent with an index trending at new highs. A fall from this level would find first support at the short term moving average, about -1%, with next support targetnear 5,400, about -4%.


The Dow Jones Industrial Average made the smallest decline, -0.03%, creating a small bodied spinning top candle. The index is sitting on support at the short term moving average, just beneath current all time highs and within the near term range. The indicators are consistent with consolidation within an uptrend, confirming support at the bottom of the near term range, and have begun to roll into a trend following entry set-up. A break below support would be bearish but may not fall much below the 19,500 to 19,000 range, a bounce from the moving average would be bullish and trend following with targets in new all time high territory.


The S&P 500 was able to post a gain, a small one, after bobbing above and below break even many times throughout the day. The index created a small white bodied candle, moving up from support at the short term moving average and long term up trend line. It appears to be drifting higher, supported by short and long term traders, although some indecision persists. The indicators are consistent with consolidation within an uptrend and showing some weakness in the near term, I might expect to see the near term range persist if not for tomorrow's NFP. A move higher would be trend following and bullish, upside targets in new all time high territory. A break below support would be bearish with downside target near 2,200.


The indices continue to churn and consolidate and now there is only the NFP (and earnings and Trump) to hold it back. The trends are up and outlook is positive, on the charts in the economy and with earnings, so I am bullish. There is a bit of risk in the market no matter what the VIX is reading, Trump's maneuvering could back-fire to say the least, so I remain cautious. If the market bounces I'm ready to ride it higher, if it corrects I'm ready to buy on the dip and in either case eagerly awaiting tomorrow's data.

Until then, remember the trend!

Thomas Hughes


New Plays

Futures Falling Again

by Jim Brown

Click here to email Jim Brown
Editor's Note

This is getting to be a routine occurrence where the futures decline after strong earnings. The market was very lackluster today and did not inspire confidence. The market traded flat despite 7.0 billion shares changing hands. The Dow traded in a narrow 91-point range and declined -6 points. The Nasdaq lost -6 and the S&P gained +1. The only time the market trades almost perfectly flat on high volume is when distribution is in progress. We saw this back in January when the Dow could not hit 20,000 for four weeks despite trading only a few points below that level. Large institutions were more than likely "distributing" their positions to those who still felt the rally had room to run.

While the S&P looks like it could be wedging up for another resistance test, the overall market feels heavy. On the positive side, the market has had multiple chances to sell off this week and avoided every one with a decent rebound. I would be hard pressed to pick a market direction today but the signs of distribution are troubling. We have a decent portfolio with trades in both directions so I am not going to add to it tonight. The futures are down -4.75 but not as severe as last night and you saw how that turned out. The market survived and closed flat.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Underperformance

by Jim Brown

Click here to email Jim Brown

Editors Note:

Once again, the Russell 2000 was the weakest of all the major indexes. In theory, this continues to suggest the market could still be facing a decline. The volatility of the Q4 earnings has surprised everyone and even stocks that are posting beats are getting slammed the next day.

The market traded a relatively high 7.0 billion shares today and the indexes all closed flat with minimal single digit gains and losses. This looks a lot like a distribution phase and those normally come before a market decline.





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


CARA - Cara Therapeutics
The long stock position was stopped at $14.45.

ENDP - Endo International
The short stock position was stopped at $12.45.

FCX - Freeport McMoran
The long stock position was entered at the open.



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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. New 52-week 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.



CARA - Cara Therapeutics - Company Profile

Comments:

No specific news. Big $3 drop intraday stopped us out for a breakeven before shares rebounded +$2 to close at $16. I considered reloading this position but there is a lot of profit in the stocks that has not been captured. Let's see which way it goes on Friday and maybe we can get another profit taking dip to $14 for next week.

Original Trade Description: January 30th

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 and they 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 it 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.

Position 1/31/17:

Closed 2/2/17: Long CARA shares @ $14.37, exit $14.45, +8 cent gain.



CX - Cemex - Company Profile

Comments:

No specific news. The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

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, see portfolio graphic for stop loss.

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



EMES - Emerge Energy Services - Company Profile

Comments:

No specific news. Shares still holding the recent gains.

Original Trade Description: January 31st

Emerge Energy Services LP acquires, owns, operates, and develops a portfolio of energy service assets in the United States. The Sand segment is involved in the production and sale of various grades of industrial sand primarily used in the extraction of oil and natural gas, as well as in the production of building products and foundry materials. Company description from FinViz.com.

Emerge recently sold off its fuel division to Sunoco and it now a pure play on frac sand. According to analysts the demand for frac sand was in the 63 billion pound range in 2016. That is expected to grow to 107 billion pounds in 2017 and 146 billion in 2018. The prior peak was in 2014 at 106 billion pounds.

Selling a commodity that every energy producer needs is similar to store merchants getting rich during the gold rush by selling picks, shovels and wheelbarrows. There is very little risk in sand as long as energy prices are stable over $50.

Emerge raised $167 million through its sale of the fuel business and another $34 million in a secondary offering in November. Funds were used to acquire more sand and continue development of their SandMaxx technology, which is a proprietary fluid for keeping sand in a liquid state while fracking. Normally sand sinks in water so some sort of suspension liquid is needed to keep it in the fluid while it is circulated through the well.

Emerge pays a dividend that yields 15.25% at current prices.

Earnings Feb 23rd.

Shares were up on Tuesday despite a weak market.

Position 2/1/17:

Long EMES shares @ $18.45, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FCX - Freeport McMoran - Company Profile

Comments:

No specific news. Shares declined only 3 cents but remain over prior resistance.

Original Trade Description: January 31st

Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, Miami, Chino, Tyrone, Henderson, and Climax in North America; Cerro Verde and El Abra in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo, Africa. The company's oil and gas operations include oil production facilities in the Deepwater Gulf of Mexico; oil production facilities onshore and offshore in California; onshore natural gas resources in the Haynesville shale in Louisiana; natural gas production from the Madden area in central Wyoming; and a position in the Inboard Lower Tertiary/Cretaceous natural gas trend onshore located in South Louisiana. As of December 31, 2015, its consolidated recoverable proven and probable mineral reserves included 99.5 billion pounds of copper, 27.1 million ounces of gold, 3.05 billion pounds of molybdenum, 271.2 million ounces of silver, and 0.87 billion pounds of cobalt; and its estimated proved oil and natural gas reserves totaled 252 million barrels of oil equivalents. Company description from FinViz.com.

Freeport has had its share of problem over the last couple years. They bought back their spinoff oil and gas company in 2014, just as the price of oil began to crater. They bought the dip and added additional reserves in the deepwater gulf but the dip was not over. They tried for a year at the worst of the market to sell the energy business and could find no takers. Finally in Q4 they sold the deepwater assets to Anadarko Petroleum for $2 billion and far less than they were worth but at least they stopped the bleeding.

The decline in the global economy caused prices for copper to fall sharply and they were forced to sell some copper reserves as well as some other mining properties. Copper was selling for less than it cost to mine it so mines shut down and the industry restructured.

After copper bottomed at $1.93 in early 2016 it remains just over $2.00 for nine months until the surplus inventories started to deplete. Copper was $4.50 back in 2011. With copper prices at a 52-week high this week, Freeport shares also made a new 52-week high today.

Freeport has also had a battle with the government of Indonesia. With copper a major export, the government implemented a program a couple years ago that only allowed refined copper to be exported. The idea was to have the multiple mining companies build huge copper smelters and hire a lot of workers at decent wages. The miners battled the government to a standstill several times and production slowed to a crawl. With copper revenue crashing the government relented to some extent. However, Freeport reported with earnings that the pressure was on again and they were going to be forced to shut down production if the government did not allow them to export. A multiweek standoff occurred. On Tuesday, the government said it was going to exempt Freeport from some of the rules and shares rose.

Freeport is actually in good shape right now. The global economy is accelerating and commodity prices are rising. They have reduced debt and refocused their priorities. I expect shares to continue climbing.

Earnings April 26th.

Position 2/2/17:

Long FCX shares @ $16.69, see portfolio graphic for stop loss.

Optional:

Long April $18 call @ $.99, see portfolio graphic for stop loss.




BEARISH Play Updates

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Still testing support at $10.

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 traded up 2% to stop us out at $12.45 for a minor 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 27th.

Position 1/17/17:

Closed 2/2/17: Short ENDP shares @ $13.22, exit $12.45, +77 cent gain.



FRED - Freds Inc - Company Profile

Comments:

Fred's reported a 5.6% decline in sales for January and same store sales fell -4.8% compared to a 0.7% gain in the year ago period. Total sales for Q4, which ended on Jan 28th, declined -4.3% to $530.7 million. Q4 same store sales declined -3.6% compared to a +1.7% rise in the year ago period. They blamed everything and everybody for their sales decline including a drop in food stamp benefits, delayed tax refunds even though this was January, warm weather, mild cold and flu season, intense competition, a change in distributors for certain products, etc. Since none of the decline was their fault (sarcasm) the stock rose 4 cents instead of crashed.

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.

Update 1/30/17: 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.

Update 1/31/17: Evercore expressed doubt that Fred's could financially complete the acquisition of additional Walgreen's stores as required in the WBA/RAD merger. The new agreement contemplates Walgreens may have to sell an additional 335 stores. That is nearly 50% more than the 865 Fred's has already agreed to buy. Evercore said that may be too large of a commitment for Fred's.

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 closed at a new low.

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.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

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 Russell was again the weakest broad market index but the pace of the decline is very slow. We need a big downdraft soon or this position will expire.

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:

No specific news. New 14-year low.

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.

Update 1/30/17: 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.

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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