Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/14/2017

Table of Contents

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

Market Wrap

Tuesday Trend Terminated

by Jim Brown

Click here to email Jim Brown

The trend for the Tuesday before a Fed announcement to be positive was terminated today.

Market Statistics

The equity markets crashed at the open after crude prices collapsed to $47 on news Saudi Arabia, the leader of the OPEC production cut group, actually produced more oil in February than January. This is the country that bragged last month about how much they cut and how successful the production cut agreement was this time. The news shocked traders and everyone raced to the exits. Later in the day, Saudi Arabia said they were not exporting the oil but storing it for future use. That headline allowed crude to rebound to $48.50 and the equity markets recovered about half their opening losses. That six-day drop from $54 to $47 was -12.9% and crude has now moved into oversold territory.


The economic reports were ignored ahead of Wednesday's Fed decision.

The Manpower Employment Outlook Survey for Q2 found that 39 out of 43 countries expected to expand employment in Q2. The component for net employment in the U.S. rose from 16 to 17. In the U.S. the percentage of respondents expecting to increase hiring rose from 19% for Q1 to 22% for Q2. Those expecting to cut workers fell from 6% to 3%. Those expecting no chance were flat at 73%.

The NFIB Small Business Survey for February declined slightly from 105.9 to 105.3. This was the first decline since September. Economic expectations dipped slightly from 48 to 47. Hiring plans fell from 18 to 15, sales expectations fell from 29 to 26. Nearly every other component declined slightly. Note the post election bounce in the chart below. Some of that optimism is bleeding off as congressional realities appear.

Moody's Chart

The Producer Price Index for February rose +0.3% after a +0.6% rise in January. Analysts expected flat prices for the month. Goods prices rose +0.3% and services prices rose +0.4%. On a trailing 12-month basis, the PPI is up +2.2% with goods prices up 4.0% and services up 1.3%. Analysts believe the rise in crude prices were responsible for the sharp increase in the PPI over the last three months.

The next two days will produce a flood of headlines as the Fed reveals their rate decision, the debt ceiling suspension expires and the Dutch election is held on Wednesday. The Fed is widely expected to hike rates and the futures are predicting a 93% chance of that event. It is the language in the statement and the press conference that will drive the markets.


The debt ceiling suspension expires on Wednesday and I have already heard/seen more comments about that in the last 24 hours than in the last 24 days. Senator McConnell said "obviously, we will raise the debt ceiling" but the timing is unclear. Some House members are already talking about tying an increase to some kind of legislation that will reduce the deficit or other pieces of legislation that could not pass otherwise. Senator Chuck Schumer and House minority leader Nancy Pelosi have already warned that democrats would not support any bill that was not clean with no other items attached. The lines are being drawn and there will be a fight. President Trump and his OMB chief have both said in the past that republicans have always been too willing to raise the limits. He campaigned on reducing the debt. This could evolve into a fight that involves the president in retaliation for democrats blocking his nominees and to establish who has the biggest clout. The market would not act favorably to that prospect.

The Dutch election is important because a win by anti-Islam, anti-immigrant, anti-EU, anti Euro candidate Geert Wilders would be a blow to the EU and the currency.

On Thursday the Swiss central bank, Bank of England and Bank of Japan will all update their monetary policy. They are not expected to make any sudden moves but you can never tell what may come out of those events.

There is a flurry of economic reports on Wednesday as well with the Housing Index and Retail Sales the most important.


Shoe retailer DSW Inc (DSW) reported earnings of 20 cents that beat estimates for 16 cents. Revenue of $674.6 million missed estimates for $695.5 million. Unfortunately, same store sales fell -7% and more than the estimates for a 5% drop. Sales per square foot of space declined -8.8%. Inventory levels remained about $25 million over analyst expectations. Analysts said DSW did not make the appropriate markdown to move slow inventory in the quarter. Analysts said the roughly 1,600 retail store closings already announced by chains like Macys, Pennys and others, would be a problem for DWS because of the liquidation prices available as those stores close. In the longer run, it will be a positive because those stores will no longer be competitors in those areas.


HD Supply (HDS) reported earnings of 44 cents compared to estimates for 44 cents. Revenue of $1.63 billion also matched estimates. You do not see that very often where both metrics are matched. For the current quarter, the company expects earnings of 60-68 cents on revenue of $1.84-$1.89 billion. That was below consensus for 72 cents on earnings but slightly above revenue estimates for $1.85 billion. Shares fell 4% on the news.


China social network YY Inc (YY) reported earnings of $1.46 on revenue of $357.8 million. The company guided for Q1 revenue of $318 to $332.6 million with the midpoint at $325.3 million. That missed estimates at $330.8 million. They ended the quarter with 56 million active mobile users, up 4.8% and 96 million active PC users. Shares fell -4% on the guidance.


The earnings cycle is really winding down with Oracle and Adobe the highlights for the rest of the week.


Disney (DIS) was upgraded to a buy from neutral at Guggenheim and the analyst raised his price target from $118 to $128. The analyst said the major theme park upgrades should breathe new life into the earnings. With a new slate of movies on tap later this year the winning streak should continue. This was perfect timing for our new play that we entered at the open today.


Corning (GLW) was downgraded by Goldman to neutral from buy and the price target lowered from $32 to $29. The analyst said valuations had become stretched. Shares fell -3% on the news.


Valeant Pharmaceuticals (VRX) was getting a lot of attention on Tuesday after Bill Ackman said he closed his 27.2 million-share position for $11 a share or $330 million. He bought into the position around $190 and then doubled down when shares were about $95. Reports claim he took a $3 billion loss. Ackman said even if Valeant doubled it would not move the needle for his hedge fund Pershing Square Capital.

This is a big problem for Valeant. Bill Ackman has nearly unlimited patience. For him to throw in the towel at $11 suggests there are some dark days ahead for Valeant. If he thought the stock had a chance at recovery, he would probably have stuck with it. Now that he is out and he is leaving the board, the rumors are going to be flying of all sorts of problems ahead both real and imaginary. They have at least a dozen probes under way by regulators, multiple class action suits and a massive $30 billion debt load that they cannot ease by selling more shares at $11. If they just return to the bottom of their downtrend channel the stock would be $7.


Tesla (TSLA) shares spiked 5% after a British car publication called Autocar, said the company would be building a compact SUV called the Model Y that would sell for slightly more than the Model 3. They even produced a picture of the rumored crossover with a very sleek design. The publication said the new model could be a very popular seller and immediate winner. However, there was not a shred of proof that the story was true.


Elon Musk has said his next vehicle project will be heavy-duty trucks and high passenger density urban transports, similar to small busses. Those are expected to be unveiled later this year.

Tesla is ready to begin shipping the upgraded versions of the Model S and Model X with a 100 KWh battery. The Model S can go 335 miles on a charge and the Model X 295 miles. The cars are ready but Tesla is waiting on EPA approval.

Short seller Andrew Left said on Monday he had exited his short on Tesla. His tone seemed to indicate he had not been successful. He said he exited and "now it will probably go down." He should be glad he got out before today's spike.


Left's next target is Transdigm (TDG) and he expects that stock to fall 40% over the next two weeks. On Friday, he said the stock could fall to $140 and could be the next Valeant but he did not expect it to unwind completely. Left said Transdigm's "days of exploiting and deceiving the Federal Government are numbered." He quoted an inquiry by the Defense Logistics Agency researching disclosures by 12 subsidiaries providing inaccurate ownership information in an annual filing.



Markets

Investors have chosen sides and placed their bets. Now they are waiting for the coming headline storm and hoping they chose correctly. There is really no way of picking a direction today. The major indexes, with the exception of the Nasdaq, all dropped back to retest support at the open on Tuesday and all rebounded slightly from that support test. They did not recover all their losses but enough to lift them back over those support levels.

The small cap stocks were again the weakest with the S&P-600 falling back to critical support at 825. That is about the tenth time that level has been tested in 2017 and if we test it enough it will fail.

The problem with the small caps is that they rallied about 21% post election on optimism about decreased regulation and lower taxes. That is very important for small businesses. That 21% gain has been in consolidation mode for the last three months. Unfortunately, the uproar over the new healthcare plan appears to be increasing rather than decreasing and the odds for passage before the August recess are slipping away. For the small cap stocks that means the potential for a tax proposal getting approved in 2018 is also slipping away. This has not yet become common knowledge but as it does, the small caps are going to weaken further.


The S&P-500 retested initial support at 2,360 and the rebound was lackluster. This is exactly where you would expect the index to settle and wait for the various headlines to pass. If the news is bad, any decline should find support around 2,300. If the news is good, the index is at a launch point where it could easily retest the highs at 2,400. We are just watching and waiting for the headline storm.


The Dow retested support at 20,800 and closed only slightly above that level. The Dow chart is turning bearish and a sell the news event on Wednesday could cause a significant decline. The support is so widely known that it is an obvious point for sell stops if it is broken. The financials are not supporting the index even with an obvious rate hike ahead. That news has been priced in for weeks and the financials are already fading. Add in the weakness in Chevron and Exxon because of the oil price crash and the Dow is vulnerable.



The Nasdaq remains the strongest index with the Nasdaq 100 setting a new high on Monday. Both indexes pulled back slightly on Tuesday but remain well above support. The big cap techs are still holding their gains and could lead us higher on positive headlines on Wednesday afternoon.




Analyst Jeff Bierman compared the current market to the Titanic. The ship's captain ignored six different warnings about icebergs in the area and continued to sail at high speed. When the fatal iceberg was spotted, it was too late to avoid it. Even after the collision, it took hours to sink. He believes the market is sailing at high speed through an environment with multiple icebergs ahead. Investors are so complacent they are like the passengers sitting in the lounge listening to the band while the ship slowly took on water. The captain ordered the band to play to distract passengers.

With the market volatility at three month lows and only slightly off three year lows, the complacency is definitely in place. Investors have convinced themselves there is no danger and the new administration is going to implement so many changes that the market and economy will only move higher. We could be entering a phase where that idea is going to run head first into congressional roadblocks that could take months to resolve. Once those roadblocks become apparent, we could see a change in trend.


The "Sell in May and go away" cycle this year could be especially rough. Investors have a lot of profits from the post election bounce and without any further market progress the arrival of May could be a problem. Actually, the cycle could start early this year for the reasons listed above.

Like everyone else, I am long until the trend changes. I am keeping my stop losses in place and I will let the market take me out rather than forcing myself to make that decision every day. If you get to the point where you start thinking about lowering your stop losses, the end is near. In the long run, that will only cost you money. Bill Ackman is wishing he had set a stop loss $3 billion dollars ago. Set an accurate stop loss and stick to it. There is always another day to trade if there is money in your account.

Happy PI day. Today is 3/14 and that is the first 3 digits in the mathematical constant of PI or 3.14159265359. Today is international PI day. Personally, I prefer the other pie with apple my favorite.


Enter passively, exit aggressively!

Jim Brown

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New Plays

Be Risk Averse

by Jim Brown

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Editor's Note

Volume was low and movement minimal ahead of the Fed decision. Investors are moving to the sidelines ahead of the headline storm ahead. We should do the same thing. There is no practical reason to put new money at risk ahead of the Fed decision and press conference. Anything is possible even a sell the news event on good comments. We are holding a lot of positions and there is no reason to add additional risk. Just keep your fingers crossed the market reaction is positive.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

That Was Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all tested critical support at the open and were saved by the dip buyers. The S&P0600 retested support at 825 with a dip to 823.87 before rebounding to close at 829 and a 0.5% loss. The Russell 2000 hit a new two-month intraday low at 1,353 but rebounded to 1,362 at the close to lose only 0.6%. The S&P retested 2,360 and the Dow 20,800. The Nasdaq was the only index that stayed out of trouble after the morning dip was bought.

Investors are starting to show more concerns about the health of the market and the flood of potentially negative headlines headed our way.





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


ECA - Encana
The long stock position was opened at $10.43.



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

ARNC - Arconic - Company Profile

Comments:

No specific news. Resistance is $27 and our stop loss is just above that level.

Use $26 as an exit target on the put. We will keep the call open just in case a headline appears.

Original Trade Description: February 16th.

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Update 2/17/17: Hedge fund Lion Point, a minor shareholder in Arconic, urged the company to "promptly engage" with Elliott Management to increase shareholder value. Elliott is the largest shareholder in Arconic is trying to get the CEO replaced and they have nominated five board members. Lion Point and Elliott both believe "the intrinsic value of Arconic materially exceeds the company's current stop price."

Update 2/23/17: Arconic declared a quarterly dividend of 6 cents on common stock, 93.75 cents on Class A preferred stock and $6.71875 on Class B shares. The dividends are payable on May 25th to holders on May 5th.

Update 3/2/17: The board appointed former UTX executive David Hess as an independent director. At the same time they issued an open letter to shareholders rebutting activist investor Elliott Management's attempt to take over the board and replace the CEO Klaus Kleinfeld. Shares declined $1 as the fight took a very public turn.

Position 2/17/17:

Long Mar $30 call @ 90 cents. No stop loss.
Long Mar $28 put @ 60 cents, No stop loss.



CSIQ - Canadian Solar - Company Profile

Comments:

CSIQ signed PPAs with the Solar Energy Corporation of India for a total of 80 Megawatts of AC power. The projects are expected t commence operations in late 2017 and generate power for the next 25 years.

Original Trade Description: February 27th

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. The company has operations in North America, South America, Europe, Africa, the Middle East, Australia, and Asia. Company description from FinViz.com.

Shares are rebounding out of a three month base at $12 and nearing a four-month high. They had a tough Q3 where they matched earnings estimates after a drop in Chinese demand due to a drop in incentives. That resulted in a 30% decline in panel prices.

CSIQ is the second largest solar manufacturer in the world with 5.8 gigawatts of annual module capacity. It has a strong pipeline of orders, $1 billion in cash and $1.2 billion in future proceeds from the sale of non-core assets. That is a lot of liquidity for a solar company. They have an operating portfolio of solar plants worth $1.4 billion that will eventually be sold to investors.

CSIQ has earnings on March 9th. Normally I would not recommend a position ahead of earnings. However, I am not recommending this as a stock position. In a normal stock position we risk about $1 per share. I am recommending we buy a call option, currently 93 cents and hold over earnings. The stock is moving in the right direction and earnings expectations are low. We could have a break out situation with CSIQ.

Position 2/28/17:

Long April $16 call @ 95 cents, see portfolio graphic for stop loss.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares dipped on the drop in WTI to $47 at the open but recovered much of the loss by day's end.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Position 3/14/17:

Long ECA shares @ $10.43, see portfolio graphic for stop loss.

Optional: Long October $11 call @ $1.40, no stop loss.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares continued their move out of the recent congestion range.

Original Trade Description: February 27th

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men, cosmetics, toys and games, sports equipment and hundreds of other categories. Company description from FinViz.com.

In Q4 revenue rose 36.5% to $2.73 billion. Full year revenue rose 40.8% to $8.15 billion. The number of active customers in Q4 rose 39% to 27.5 million. The number of total customers rose 42% to 52.1 million. Total orders for Q4 rose by 26% to 82.0 million. Total orders for the full year rose 40% to 269.8 million. Gross profits for Q4 rose 33.4% to $643.4 million. Gross profits for the full year rose 37.4% to $1.96 billion. They added five local distribution centers to further improve speed and efficiency of order processing. They have more than 20,000 staff and 2,000 self-operated delivery stations.

Earnings May 22nd.

Vipshop is tiny compared to Alibaba but they are growing rapidly and the three main rating agencies recently gave them favorable ratings. Fitch rated them BBB+, Moody's Baa1 and S&P BBB. The company is not a flash in the pan and those ratings indicate they are solid.

Shares spiked to $13 on the earnings news and moved sideways for a week. They posted a minor gain today in a weak market to close at a five-day high.

Update 3/7/17: The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

Position 3/3/17:

Long VIPS shares, currently $13.15, see portfolio graphic for stop loss.
Position 3/6/17: Long April $14 call @ 30 cents, no stop loss.




BEARISH Play Updates

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Shares are still clinging to psychological support at $8.

Original Trade Description: March 6th

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 28th.

I believe Conn's will continue lower because everything we have heard about the Q4 retail picture has been negative. Shares are trading at a 6-month low with support at $6.50. I believe we can still get $1.50 between now and earnings on the 28th. The odds of a rebound over the next three weeks are very slim.

Position 3/7/17:

Short CONN shares @ $8.00, see portfolio graphic for stop loss.
No options recommended because of price.



FOSL - Fossil Group - Company Profile

Comments:

Moodys downgraded Fossil's credit to Ba1 and Ba2 on two separate facilities. Outlook remains negative. Monday's close was a new 8-year low. Only a minor 13 cents rebound today.

Original Trade Description: March 5th

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC BY MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, company-owned retail and outlet stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of January 2, 2016, it owned and operated 99 retail stores and 139 outlet stores located in the United States, as well as 250 retail stores and 131 outlet stores internationally. Company description from FinViz.com.

Fossil reported adjusted earnings of $1.36 that beat estimates for $1.21. Unfortunately, that was a decline of 23.2% over the year ago quarter. Revenue of $959.2 million declined -3% and missed estimates for $971.7 million. For the current quarter, the company expects to lose 10 to 25 cents compared to earnings of 11 cents a year ago. They guided for a wide range for earnings of $1.00 to $1.70 for the full year. They guided for Q1 revenue to decline 8% to 11.5%.

Traditional watch sales declined -2%. Sales of jewelry and leathers declined -5%. Global same store sales fell -7% with declines in all product categories. Gross margin declined 200 basis points and operating margins fell from 9.0% to 6.9%. Cash on hand at the end of the quarter declined -$64 million to $236 million.

Over the last 30 days consensus earnings estimates for the ful lyear have declined from $1.94 to $1.19. All revisions have been negative.

Earnings May 16th.

Shares dropped sharply on Friday after the consensus earnings revisions were released. The $17.42 close was an 8 year low and the very negative comments above suggest shares could go a lot lower.

Position 3/6/17:

Short FOSL shares @ $17.48, see portfolio graphic for stop loss.

Optional: Long April $17 put @ $1.00, see portfolio graphic for stop loss.



INFN - Infinera Corporation - Company Profile

Comments:

No specific news. New 4-week low close.

Original Trade Description: February 25th

Infinera Corporation provides optical transport networking equipment, software, and services worldwide. The company offers Infinera DTN-X family of platforms for subsea, long-haul, regional, and metro mesh networks; Infinera DTN platform for subsea, long-haul, and regional mesh networks that support a range of Ethernet and optical transport network client interfaces; and Infinera FlexILS Line System platform that connects various Infinera platforms over long distance fiber optic cable. It also provides Infinera TM-Series, a carrier-grade packet-optical transport platform; Infinera TS-Series, a passive optical wavelength-division multiplexing (WDM) product; Infinera Cloud Xpress Platform, a compact platform for cloud/data center interconnect applications; and Infinera ATN Platform, a small form-factor WDM platform. In addition, the company offers Infinera Open Transport Switch, a software platform that enables abstraction and virtualization of the underlying Infinera platforms; and Infinera Management Suite, a network management system used by network operators to manage various Infinera platforms. Further, it provides various support services for vraious hardware and software products. The company serves communications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, and government entities. Company description from FinViz.com.

Infinera makes products primarily used by telecom companies to increase their capabilities over existing fiber optic cables to reduce the need to laying more fiber. Their major market today relies on infrastructure upgrades in China, which is a very competitive market.

The company reported a loss of 12 cents that narrowly beat estimates for a 13 cents loss but was down sharply from the 5 cent profit in the year ago quarter. Revenue declined 30% to $181 million but did beat estimates for $175 million. For the current quarter they guided for revenue of $167-$178 million, down from $249 million in the year ago quarter. Analysts were expecting $171 million. However, they guided for a loss of 16 cents and analysts were expecting 11 cents.

Analysts claim the company is suffering from a perfect storm of M&A among its biggest clients that has reduced demand.

Earnings May 11th.

After trading flat at $8.50 for seven months the shares spiked to just over $12 on the better than expected earnings. Short covering is a wonderful thing if you are long. However, everyone that sat on the $8 stock for seven months is now running for the exits. I believe the stock will return to its prior levels given the negative guidance.

Position 2/27/17:

Short INFN shares @ $10.87, see portfolio graphic for stop loss.

Optional: Long July $10 put @ 78 cents, see portfolio graphic for stop loss.



KR - Kroger Co - Company Profile

Comments:

No specific news. The Dow Theory Forecasts newsletter cut their rating on Kroger from buy to sell based on declining fundamentals, increased competition and disappointing guidance.

Original Trade Description: March 7th

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 30, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as franchised 78 convenience stores. Company description from FinViz.com.

Kroger reported earnings of 53 cents that matched estimates but declined 7% from the year ago quarter. Revenues rose 5% to $27.611 billion and that best estimates for $27.357 billion. Same store sales fell -0.7% and the first decline in 13 years. Analysts expected a 0.1% rise. Competitors Ahold Delhaize, Walmart, Publix and Aldi reported an increase in sales so apparently Kroger is losing market share.

They guided for 2017 for earnings in the range of $2.21-$2.25 per share. Analysts were expecting $2.23.

Earnings June 1st.

There is a major battle shaping for the grocery sector. German discounter Aldi is on a push to open hundreds of new stores in areas currently served by Kroger. Target has vowed to lower prices and sacrifice margins in order to retain market share. Amazon is experimenting with the grocery store concept and has been rumored to be considering opening more than 1,000 stores. Walmart has expanded their grocery departments and now carry more than 350 organic products under the private Walmart labels.

Kroger has been forced to adopt a more promotional posture with bigger ads and lower prices in order to retain share. Goldman removed Kroger from their conviction buy list and warned they doubt they will be able to even get close to their forecast for 8-11% earnings growth. Northcoast cut them from buy to neutral and several analysts cut their price targets.

Tuesday's close was a two year low and the decline is not likely to stop. The grocery sector is broken and profits are going to be tough to generate.

Position 3/8/17:

Short KR shares @ $28.85, see portfolio graphic for stop loss.

Optional: Long April $27.50 put @ 45 cents, no stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

News out after Monday's close that Sears lenders had hired Kramer Levin to represent them in expected bankruptcy talks weighed on the stock today. Shares fell -4.5%.

Original Trade Description: March 11th

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. Sears is eventually expected to file bankruptcy. It is only a matter of time.

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 Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. 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.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Update 3/13/17: Sears lenders hired Kramer Levin to represent them in expected debt talks. The lenders are expecting trouble so they already hired a bankruptcy firm. That is not a good sign for Sears.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Position 3/13/17:

Short SHLD shares @ $9.10, see portfolio graphic for stop loss.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.





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