Option Investor
Newsletter

Daily Newsletter, Monday, 2/6/2017

Table of Contents

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

Market Wrap

Adrift

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The indices pulled back from Friday's close on geopolitical inspired caution. Trump, trade wars and immigration bans were not the only issues making headlines today, scandal with one of the French presidential candidates has raised the specter of political instability within the EU once again and helped depress today's trading. The bad news is another Monday without a retail-investor driven flood of new money, the good news is that positive fundamentals and forward earnings outlook is unchanged.

Asian indices were able to close higher in the Monday session. The Japanese index rose by roughly 0.35%, supported by earnings outlook and in particular that of Toyota. The worlds 2nd largest auto manufacturer raised its full year guidance on a weaker yen and cost-cutting efforts. European indices were positive early in their day, lifted by earnings, but fell later in the day as concern over the French election, Italian banks and Donald Trump gripped the market.

Market Statistics

There was little new news in the early hours of the morning, just more speculation over events already in motion. US economic data was absent, a 5.2% surge in German factory orders went largely unnoticed. Early futures trading indicated a mildly negative to flat open, trading was a bit choppy, and that held all morning. The SPX was indicated to open with a loss of -5 points and that is what happened. Despite the down open support kicked in fairly quickly, within the first 2 minutes of trading, and kept the indices from falling any further, at least not until later in the day. After a few hours of directionless sideways action the indices were back testing the early low. It was broken just after 12 noon but additional losses were also minimal, the SPX topping out at -9 points. Intraday bottom was hit just before 2PM. From then on the market made a slow steady progression to the upside, recovering about half of the early loss by the time the closing bell sounded.

Economic Calendar

The Economy

There was no official economic data today and there will be very little this week which means the market will be even more susceptible to news and news driven activity than usual. Early in the week the only significant bit is the JOLTs report, I don't expect much move on this number unless some really big changes are revealed. Later in the week news will be dominated by jobless claims on Thursday and then Wholesale Inventory and Michigan Sentiment on Friday.

Moody's Survey Of Business Sentiment is holding steady. The index gained 0.3% this week to hit 31.4, down from the post-election peak but well off the long term lows set last summer. Mr. Zandi says that global business is confident and upbeat about present conditions and future outlook. According to respondents sales remain soft but investment and the availability of financing are strong. So long as things don't change there is a chance we could see these figures begin to pick up going into the spring and early summer.


Earnings continue to roll in with the usual mixed results. To date, a little more than 55% of the S&P 500 has reported for the season and trends are holding up. A little more than 65% of those reporting have beaten EPS estimates, close to 52% have beaten revenue estimates and the blended rate of growth is creeping up, gaining another 0.3% this week to hit 4.6%. Based on the trends we can expect the blended rate of earnings growth to continue rising into the end of the quarter, possibly as high as 7.5% to 8%. On a sector basis 9 of the 11 sectors are beating estimates. This week we can expect to hear from a total of 84 more S&P companies.


Forward outlook remains positive but estimates fell in the last week after rising in the previous week. Full year 2016 estimate shed the tenth it gained and is now back to 0.2%, likely to rise again before the season is said and done. Full year 2017 estimates fell a full half percent to 11.1% but are still quite strong compared to this year. On a quarter to quarter basis growth is expected to expand to 10.8% in the 1st quarter, moderate to 9.6% in the 2nd and then expand again to over 11% in the 3rd and 4th.


The Dollar Index

The Dollar Index tried to rebound but does not look like it will be able to, not in the near term. The index is falling under the pressure of rising global currencies while FOMC support has seemingly disappeared. Today's action, while testing resistance, appears to be part of consolidation below resistance and within a near term down trend that is likely to continue in the face of FOMC uncertainty and the possibility, however unlikely, of the ECB or BOJ getting hawkish. Resistance is now the $100.50 level, downside targets are near $98.65 and $97.65 in the near term. Longer term the fundamentals remain skewed toward dollar strength; US economic conditions and FOMC outlook is still dollar strong, BOJ or ECB policy change wishful thinking at best.


The Gold Index

Gold prices continue to move upward but the move lacks strength. Considering the amount of uncertainty in the market and forward outlook it is possible the gains are due to a lack of sellers rather than to an abundance of buyers. Today's move took spot prices up by more than 1.20% to trade at a near 3 month high, just above $1235. The move is driven by flight-to-safety and dollar weakness, either of which could reverse with a single positive development in sentiment. Longer term outlook remains weak, the US economy is expected to strengthen even if the dollar does not. Next target for resistance is $1,250.

The Gold Miners ETF GDX moved higher today as well. The move added more than 2.75% to Friday's 2.5 month high and is approaching next resistance at $25.63. The indicators are bullish in the near term, and showing bullish crossovers, but both MACD and stochastic are showing divergences that indicate serious weakness in the underlying market. How high the sector goes in the near term is hard to day, flight-to-safety inflows could be refueled tweet by tweet, when the bottom falls out the move lower could be huge.


The Oil Index

Oil prices fell more than -1.5% today as rising US rig counts and production, and high levels of storage, more than offset the OPEC production cuts. WTI fell more than $0.75 to trade just above $53, near the middle of the near term range. Despite today's drop the tug-of-war continues between supply and demand, bullish or bearish, and this may go on into the near term. So long as prices remain above $45 expect US producers to keep pumping, and keep ramping production, until they fall or OPEC does something else.

The Oil Sector was one of the market leaders today, falling nearly a full percent. The Oil Index fell -0.96% on uncertain oil prices and poor earnings from the big producers although full year/forward outlook remains quite good. Forward outlook for full year 2017 earnings growth has fallen from a high above 350% to only 294%, hindered by oil price uncertainty, but still a much needed step in the right direction. Today's action is consolidation beneath the short term moving average and resistance at 1,250. A drop below the near term range, 1220 to 1250, would be bearish with downside target near 1,200 or 1,150. If such a move did develop it would be a likely buy-the-dip opportunity for long term bullish positions.


In The News, Story Stocks and Earnings

Earnings are still going to be front and center this week, nearly 17% of the S&P 500 is reporting which will put the total above 70% and high enough to have some confidence in to-date results as an indication of which way the wind is blowing. The mornings news was dominated by Hasbro, among others, which beat on both the top and bottom lines, raised guidance and upped the dividend. Results beat estimates soundly, adjusted EPS of $1.64 beat consensus $1.27 by 30%, with growth in all segments and led by the US. Growth in North American was 15% alone, management said they saw no difference in holiday sales from years past and are expected to remain at least steady into the coming year. Shares responded favorably to the news, rising nearly 15% in pre-market trading to open, and close, at a new all time high.


Sysco, not Cisco, the nations largest purveyor to restaurants of all variety reported earnings before the bell. The company delivered better than expected profit on revenue that only matched estimates. Revenue grew by 10.6%, earnings by 4%, both meeting expectations. Adjusted earnings beat by 8% and helped propel the stock higher in premarket action. Shares gapped up at the open to trade just below the short term moving average, where resistance set in, and fell throughout the day on heavy volume to close with a loss greater than -2.50%.


Tyson Foods, one of the nations largest processed food producers, announced some stellar results before the bell too. The company reported its best 1st quarter in company history and the best quarter in company history, beating estimates and growing EPS by 38% year over year. Results are driven by growth in all segments compounded by an increase in margins and led to an increase in full year guidance. Guidance is now a range of $4.90 to $5.05, a 12% increase over the prior year and above consensus estimates. Shares of the stock jumped on the news and gapped up at the open. The move put share prices just high enough to close a much larger gap opened shortly after the last earnings release, and triggered massive selling in the stock.


The Indices

The indices didn't move higher, but they didn't really sell off either. Today's action was more of the same cautious rotation out of lesser earning stock into greater, more of the same slow upwardly biased sidewinding we've seen for the last three months. Price action was led by the broad market S&P 500 which closed with a loss of -0.21%. Where the other indicators were at least able to create white bodied candles, come moving into positive territory intraday, the SPX did neither. The broad market created a very small spining top doji with a close just below the open. This candle is sitting just beneath resistance at the all time high and just above the short term moving average and rising support along the long term moving average with indicators that are yet again signaling a trend following entry. All we need now is a break to new high, and some nice follow through. A break to new all times is bullish with upside targets near 2,350 and 2,500, a fall below the short term moving average would be bearish with downside targets near 2,250 to 2,200.


The Dow Jones Transportation Average made the next largest decline, -0.11%, creating a doji candle. Today's candle is more than a spinning top but not enough to be really decisive and a sign of continued market struggle. Action was centered on the 9,321 level, a previous all time high and near term resistance. Support is the short term moving average. The indicators are a bit mixed, consistent with sideways range bound trading, and not much help at this time. A move up would hit resistance at the current all time high, near 9,500, a move lower would find short term support at 9,000.


The Dow Jones Industrial Average posted the third largest decline, falling -0.09% after a small push into positive territory. Today's move created a small spinning top candle, sitting above support, that touched resistance exactly at the current all time high. Support is the rising short term moving average, confirmed by both MACD and stochastic, both of which are consistent with a trend following entry. Stochastic is already firing a strong signal, MACD is on the cusp of confirming yet again, with upside target near 25,000.


The NASDAQ Composite made the smallest decline in today's session, only -0.06%. The tech heavy index created a very small spinning top doji just beneath the all time high. The index is a bit elevated from support targets along the short term moving average but the indicators suggest upward drift could continue. Momentum is not strong but it is still bullish and stochastic is showing a weak buy signal above the upper signal line, consistent with an upwardly drifting market. Upside target is near 5,750, 5,500 if a pull back begins.


The market is not sure what to do. On the one hand is political risk on all fronts. On the other are fundamentals. Political risk could alter the fundamentals, that's why it's risk, but the fundamentals are yet to be altered, and right now they are bullish. Economic growth is expected with or without Trump and so is earnings growth. Until that changes these near term corrections and down days driven on fear are buy-on-the-dip opportunities because once the fear evaporates the fundamentals will shine bright once again. I'm bullish, cautious as ever because there is still near term risk, but waiting and watching for those trend following opportunities.

Until then, remember the trend!

Thomas Hughes


New Plays

I Hate This Stock

by Jim Brown

Click here to email Jim Brown
Editor's Note

It never goes down and never gives us a decent entry point. I have been trying to add this position for a couple weeks and every day it just gaps higher. Every decline I think, ok good, a couple more days as we can buy it. It has not gone down two days in a row since earnings. I give up.


NEW BULLISH Plays

STM - STMicroelectronics - Company Profile

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest chipmaker. The company reported revenue of $1.86 billion, an 11.5% increase. The also raised guidance for Q1 saying they expect 12.5% growth. The CEO said, "Based on market forecasts, a positive booking trend, and a strong performance at our distributors, we see the momentum from the second half of 2016 continuing as we enter 2017."

The chipmaker said improved efficiencies and product mix lifted gross margins from 33.5% to 37.5%. Their smartphone market share helped increase sales in that division by 17.8%. The automotive and industrial products segment saw sales increase 12.5%. STM is a supplier to Apple, Cisco Systems, HP, Seagate and Western Digital. Every one of those companies are reporting stronger sales and new product lines, all of which helps STM. They also make chips for drones, 3D printing and a wide variety of IoT products.

The consensus earnings estimates are for 103.4% growth in 2017.

Earnings April 27th.

Shares have caught fire because of expectations for a large boost in chips for the iPhone 8 or X whatever they end up calling it.

This stock is not cheap with a PE of 75 but the outlook is so strong that volume is exploding and the stock will not go down. We are going to hold our nose and buy it. A safer way to play this would be to buy the call option. That way your total risk is 70 cents a share.

Buy STM shares, currently $14.26, initial stop loss $13.25

Optional longer-term play: Buy April $15 call, currently 70 cents. No initial stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Biggest Loser

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 fell -0.8% to be the biggest loser among the broad market indexes. The tale of two markets continues with the small caps trending lower and the big caps trending higher. The Dow moved to within 9 points of 20,100 intraday but fell back 40 points to end with a minor loss.

The S&P also faded from the resistance at 2298-2300 to close at 2,292 and a 5 point loss. The Nasdaq was negative by 3 points but the Nasdaq 100 big cap index rose 6 points to close only 1 point below a new high.

The market missed another good chance to sell off but there were no sellers. The minor retracements were just simple profit taking after Friday's big short squeeze. The lack of selling in the big caps suggests the next move will be higher despite the weakness in the Russell.





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


AKS - AK Steel
The long position was entered at the open.



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BULLISH Play Updates

AKS - AK Steel - Company Profile

Comments:

No specific news. Minor gain and still holding over support.

Original Trade Description: February 4th

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.



BOX - Box Inc - Company Profile

Comments:

No specific news. New 52-week high close on Friday. Cramer said today it was going to $20. That could be the kiss of death.

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. Shares fell -3% ahead of earnings to stop us out of the stock position. We will continue holding the call.

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.

Update 2/2/17: 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.

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:

Closed 2/6/17: Long CX shares @ $9.42, exit $9.05, -.37 loss.

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



EMES - Emerge Energy Services - Company Profile

Comments:

The breakout continued with another 5% gain. They announced a new earnings date a week later on Feb 27th. I had to raise the stop a lot because the $3 gain could see profit taking at any time.

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 27th.

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 and no further decline from Friday's mine update. Waiting on the Indonesian government now.

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.

Update 2/3/17: Freeport provided an update on the progress of negotiating with the Indonesian government on the new rules for exports the government put in place in January. Freeport warned that an unsuccessful outcome could reduce production by 70 million pounds of copper and 70,000 ounces of gold per month until approvals are received. This a high stakes game of chicken. The government wants to limit production and export of raw material and increase the amount that is smelted in Indonesia. However, there is not enough capacity at the jointly owned smelter and the mining companies do not want to commit millions of dollars to build a new smelter unless they are guaranteed an operating contract longer than five years, which is what the government is offering. The government is offering the option of a five-year extension but it is not guaranteed. Also, at the end of ten years the miners must have sold at least 51% of their business to Indonesian investors. So, spend millions to build a smelter, live under our austerity rules for the next five years and maybe we will let you continue but after 10 years controlling interest in your business belongs to Indonesia. Freeport has been fighting government rules for years and typically the government buckles because they need the export income and the jobs.

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. Shares traded under $10 intraday but rebounded back to flat just before the close.

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.



FRED - Freds Inc - Company Profile

Comments:

No specific news. No material movement. Barely holding on to support at $14.

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.

Update 2/2/17: 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.

Position 1/24/17:

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



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Big 8% decline on worries they are going to miss on earnings.

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 posted a strong decline but remains well out of range for our put. The rebound over the last week probably doomed our position. However, we are only 1 point out of the money so another day like today would puts us back in play.

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 on Monday. Shares fell -5.2% on a WSJ article warning that time was running out for Sears.

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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