Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/11/2017

Table of Contents

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

Market Wrap

Emailgate

by Jim Brown

Click here to email Jim Brown

A calm day in the markets was interrupted with a triple digit intraday drop on an email revelation.

Market Statistics

The markets were posting minor gains and moving slowly higher until 11:AM. That is when Donald Trump Jr tweeted copies of an email exchange where a friend of a friend offered to set up a meeting with a lawyer for the Russian government that wanted to give Trump some dirt on Hillary Clinton's dealings with Russia. The algorithmic computers read the headlines and the market crashed. The Dow dropped -159 points from its 11:AM high to trade at 21,279. The other indexes followed suit but with less of a decline.

Almost immediately, the trade reversed when the facts showed all the "Russia" comments came from the friend and were incorrect. The lawyer had no dirt, was not connected with the Russian government and only wanted the intro to Trump to discuss Russian adoptions. I am sure the "friend" is no longer a friend after the bogus setup and now the feeding frenzy in the press over the potential for something to have happened had the claims been real. If the lawyer had produced some dirt, the outcome could have been a lot different.

Regardless of what happened at that meeting or what will happen after the various Russian investigations get done pouring over the facts, the market crashed intraday and then rebounded back to where it started.


The morning economics were mixed. The NFIB Small Business Survey for June declined from 104.5 to 103.6. While the decline was slightly larger than expected, the Optimism Index is still well above pre election levels. The individual components were mostly lower but only slightly. Those respondents planning on increasing capex rose from 28% to 30% and those planning to increase inventories rose from 1% to 4%. Those planning on increasing employment declined from 18% to 15%, expect the economy to improve fell from 39% to 33% and those expecting higher sales down from 22% to 17%.

Moody's Chart

The California Manufacturing Survey for Q3 declined from 62.2 to 61.0. That is still a healthy expansion level despite the decline. The new order component declined from 63.5 to 62.8, employment from 61.2 to 58.2, production from 65.7 to 65.5. This report was ignored.

The Job Openings and Labor Turnover Survey for May fell from a 4.0% openings rate to 3.7%. The number of available jobs fell to 5.666 million from April's peak of 5.967 million. Hires rose from 5.043 million to 5.472 million. Separations rose from 5.008 million to 5.259 million. Quits rose from 1.605 million to 1.661 million. This is bullish for the jobs market because people do not normally quit their jobs unless they are confident they can find a better job rather quickly or have already been hired elsewhere. This was a lagging report for May and it was ignored.

Wholesale inventories for May rose 4% after a -0.4% decline in April. This was the strongest inventory build since December. Durable goods rose +0.6% and nondurable goods were flat.

Inventories rose sharply because of a -0.5% decline in sales. Durable goods sales fell -0.1% and nondurable goods sales fell -0.9%. This was the third consecutive month of sales declines. The inventory to sales ratio rose to 1.29 and the first rise in five months.

The Atlanta Fed real time GDPNow for Q2 declined to 2.6% growth after the payroll report on Friday and the Wholesale Inventories today.


The calendar for tomorrow revolves around Yellen's testimony. Her opening statement will be released to the press at 8:30 and her testimony will begin at 10:AM. Traders are worried she could attack stocks again as being overvalued. There have been multiple comments from her about that over the last couple weeks. Traders are hoping to avoid a repeat of the Alan Greenspan "irrational exuberance" comment like the one he used to tank the market on December 5th, 1996 when the Dow fell -3.4% the next day. Whenever the Fed is trying to talk down the market, traders will listen.

Yellen gets two chances with her testimony on Wednesday and then the repeat performance on Thursday.


There are no material earnings until Friday when the major banks report. Expectations are high for the bank results and even more so after the Fed approved their capital return programs. There could be a sell the news event if the details are not outstanding.


PepsiCo (PEP) was the only major earnings report on Tuesday. Pepsi reported earnings of $1.50 compared to estimates for $1.40. Revenue of $15.71 billion also beat estimates for $15.64 billion. The company guided for the full year for earnings of $5.13, up from $5.09 but that was still a penny below analyst estimates at $5.14. Gross margins declined 55 basis points and operating margins declined 20 basis points. Shares declined sharply at the open but recovered to end the day with only a 53-cent loss.


Michael Kors (KORS) shares fell 7% after MKM Partners reiterated a sell rating and $26 price target. Shares closed the day at $33.25. The analyst said KORS was to slow to innovate and make changes to the merchandising and promotional strategy. She said they were overexposed to wholesale and they needed to invest more in the online business and the product mix was shifting to lower margin categories. Operating margin has declined 900 basis points since 2013 and the analyst is expecting another 430 bp decline in FY 2018.


Barclay's cut Toll Brothers (TOL) to underweight from equal weight, which is the equivalent of neutral to sell. The analyst said a June survey showed moderating buyer traffic and they expect builders to post disappointing results and guidance for the quarter. "Our buyer traffic index decreased from 61 in May to 53 in June. Within builder's primary markets, our weighted index declined from 53 to 47, and falling below expectations for the first time in 2017." Toll Brothers declined -2% but that was minimal compared to their long string of gains. The entire sector decline with the exception of CAA and NWHM.



Ulta Beauty (ULTA) shares fell -5% on zero news. The retail sector is dragging down every company regardless of product or sales method. If they depend on a mall for revenue, they are being sold. Put buying is rampant and short interest is up 49% and at the highest level in nearly a year.


Snap Inc (SNAP) is now the second most hated stock on the street behind Blue Apron (APRN). Snap fell below its $17 IPO price today after their underwriter, Morgan Stanley, downgraded them from overweight to equal weight. MS said Snap's ad business was struggling. They blamed Facebook's Instagram product, where the company is giving away free ads with every post. They also warned that user growth was slowing more than expected. MS said Snap's ad products are taking longer to evolve and competition is peeling away potential advertisers. Instagram has more than 450 million daily active users compared to Snap's 166 million.


Blue Apron (APRN) shares fell -12% after Northcoast initiated coverage with a sell rating and a $2 price target. The Amazon acquisition of Whole Foods is depressing an already questionable IPO. Whole Foods has fresh food and Amazon knows how to ship it fast. That means a potential competitor for the fresh food space that will be an 8,000 pound gorilla the day they decide to compete. If you can borrow these shares, it should be an easy short.


If you did not know it was Amazon Prime Day, you are obviously not a Prime subscriber. Amazon expects to sell $2 billion in advertised specials today and all of those products will be delivered by Saturday. Yesterday my postman said they were adding some workers on Thr/Fri to handle the expected deluge of packages.

One analyst said there would be $10 billion in lost productivity on Tuesday as a result of the time spent looking at the Amazon bargains. He calculated that using the estimated 85 million Prime subscribers spending only 1 minute each looking at ads while at work. Obviously, he is not paying attention. With more than 100,000 discounted products popping up with a new set of ads every 5 minutes, there is far more than 1 minute wasted by Prime subscribers.

If you do not know what Amazon Prime is or just want to see some of the specials, just click the Prime Day image below.

Amazon shares declined slightly, which is normal. For the last three years, they rose into the event and then suffered a sell the news drop on the actual day.


Alibaba (BABA) shares rose $2 because they are benefitting from the hype around Amazon. Alibaba's Singles Day in November is expected to bring in $20 billion in sales compared to Amazon's $2 billion.


Crude prices rallied after the close when the API inventory report showed an 8.133 million barrel decline for last week. Analysts were expecting a decline of -2.99 million barrels. Gasoline inventories declined -801,000 barrels and distillate inventories rose 2.079 million.

Goldman Sachs warned that crude prices were going to fall under $40 without a shock and awe production cut by OPEC. That is not likely to happen.


Tesla's Elon Musk bought back his first domain from PayPal. That domain was X.com. Ebay got the domain when they acquired PayPal from Elon Musk and Peter Theil. PayPal kept it when they were spun off from Ebay. Musk said he has no plans for it today but we all know he will probably come up with a new business just so he can use the name. He said it had sentimental value to him.

PayPal (PYPL) shares declined slightly after an analyst made the case for them buying Square (SQ). Square shares rose 6.3% on the news. The analyst said PayPal could make significant inroads into the brick and mortar businesses with their strength behind Square.


Markets

If it were not for the email crash at 11:AM, it would have been a boring day in the markets. Nobody wants to jump in front of Yellen with a bunch of longs just in case she attacks high equity prices as the reason they need to continue raising rates.

On a positive note, the Fed's Lael Brainard said the Fed may have reached its limit on rate hikes due to the lack of inflation but they could begin to taper their QE purchases as soon as the July meeting. Those comments about 11:30 helped to lift the markets off the email lows.

Volume was only 5.9 billion shares but would probably have been a lot less without the email crash in the middle of the day. That drop triggered a lot of sell stops and active traders bought the dip. Those were trades that would not have happened with the headline.

The S&P dipped to 2,412 on the headline and rebounded to 2,429 where it ran into downtrend resistance and came to an immediate halt. This is a likely resting point until the Yellen testimony on Wednesday. We have a clear support level in the 2410-2415 range from the last several declines and solid resistance at 2,440.


Only three Dow stocks had moves over $1. Other than the morning drop, the session was very quiet. The rebound from the 21,279 low came to a dead stop at downtrend resistance at 21,440. This level is going to be a challenge unless Yellen utters some kind words to lift bullish sentiment.



The big cap tech stocks were positive with the exception of Amazon and Adobe. The Nasdaq closed well above prior resistance at 6,175 and is testing the 6,200 level. We need a close over 6,250 to really generate some short covering and price chasing. Once we exceed that level, traders will begin to believe in a summer rally scenario.




The small caps were neutral today. The Russell closed right in the middle of its recent congestion with neither a bullish or a bearish bias.


Wednesday and Thursday will be governed by Janet Yellen. Traders will be calmly waiting for the news and assuming she does not attack stock valuations, we should see a positive bias into the earnings cycle that begins on Friday. There is no rush to load up on bullish or bearish positions. We will have plenty of time to do that next week once the testimony headlines fade.

There will always be another day to trade if you have capital in your account.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Fedspeak

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Fed head will preach on economics and overvalued stocks on Wednesday. While we cannot guarantee she will attack stock values again she has commented on it several times recently. Depending on whether she does it and how strongly she speaks on the topic, we could have a significantly down day. If she skips the topic and talks up the economy, we could have a good days. Tonight it is a coin toss. Nothing in my scans was screaming buy me so I recommend we wait until after the short lady speaks.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Resistance Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

Resistance held on the Dow and S&P but the Nasdaq moved up one level. The big cap indexes struggled to make any gains despite rebounding from the intraday lows. The Dow was down triple digits on the Trump Jr Russian email documents. The Dow recovered to close fractionally positive and the S&P lost 2 points.

The Nasdaq closed well over prior resistance at 6,175 and is closing in on the 6,200 level. The Russell had a decent day but remains stuck in the middle of its recent congestion.





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


FTR - Frontier Communications
The short position was entered at the open.



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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Minor decline from the new 3-month high.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

Kratos was awarded a contract from the U.S. Government to help define the next generation ground architecture for wideband communications for the Dept of Defense. The project is to come up with solutions to maintain satellite contact in a wartime environment. No dollar amount was given.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.

Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

CARA - Cara Therapeutics - Company Profile

Comments:

No specific news. Minor rebound from the -$1.41 drop on Monday.

Original Trade Description: July 8th.

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

Cara had two drugs in the pipeline. CR701 is a cannabis derivative for pain management that is not an opiod. It would seem to be a promising drug but the company is not pushing it towards acceptance.

Their hot new drug CR845 is a kappa-opioid receptor that is being studied for severe itching caused by chronic kidney disease and for various types of pain.

Last week they reported results for a phase 2b study on CR845 that were not statistically significant. The three levels of medication included 1.0 mg, 2.5 mg and 5.0 mg. The 1.0 and 2.5 failed to show any results. The 5.0 mg showed only a minute improvement in pain that could have been related to the placebo effect or simply random chance. The trial was a failure.

CARA had run up significantly on the hopes for the drug. Shares imploded over five days to give back half their value. I would not normally recommend a position with such a large decline but the six day rally before the results was roughly $9 so an $11 drop just erased that last bit of irrational exuberance. With CR845 in limbo until new trials and new uses can be developed and CR701 apparently on hold for some unknown reason, the company suddenly has no appeal for investors. If light support at $13.40 fails we could see $8.50 very quickly. Investors are suddenly fleeing this sinking ship.

Expected earnings August 3rd.

Position 7/10/17:

Short CARA shares @ $13.50, see portfolio graphic for stop loss.
Alternate position: Long Aug $12.50 put @ 1.05, see portfolio graphic for stop loss.



FTR - Frontier Communications - Company Profile

Comments:

No specific news. Shares resumed their pre-split decline.

Original Trade Description: July 10th.

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Frontier Communications Corporation was founded in 1927. Company description from FinViz.com.

Earnings August 1st.

When a company's stock enters the terminal decline mode and reaches penny stock status, many will do a reverse split to avoid being delisted. The hope is that lifting the stock from $1 to $15 will entice funds to come back to your shares. Many funds are prohibited from holding stocks under $5 so they would have left the stock when that $5 level was broken. The problem with this strategy is that the stock is normally in a terminal decline and just bumping up the stock price does nothing to change the fundamentals.

Also, when a declining stock suddenly jumps back to $15 as is the case with Frontier, that encourages the shorting community to double down at the higher prices. Shorts that rode it down the first time, see the news and jump back in for another ride. FTR shares closed at $1.06 on Friday.

You cannot use options this soon after a reverse split. The premiums are crazy. After several days they will mellow and I will look at adding them to the recommendation.

Position 7/11/17:

Short FTR shares @ $14.68, see portfolio graphic for stop loss.



PPC - Pilgrims Pride Corp - Company Profile

Comments:

No specific news. Only a minor 6 cent rebound from Monday's 4-month low. Approaching support at $20.25.

Original Trade Description: June 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.

I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.

Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.

PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.

Expected earnings August 2nd.

Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.

Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.

Position 6/27/17:

Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. Only a 14 cent rebound.

Original Trade Description: July 5th.

Sears Holdings Corporation operates as an integrated 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, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 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 merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.

Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.

Expected earnings August 24th.

In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.

Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.

Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.

I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.

Update 7/7/17: CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Position 7/6/17:

Short SHLD shares @ $8.60, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The intraday market dip spiked volatility but it faded again into the close.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





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