Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/12/2017

Table of Contents

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

Market Wrap

The Yellen Surprise

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Janet Yellen testified before congress in what could be her last appearance, and what she said surprised the market. Her testimony in a nutshell; the balance sheet should begin to shrink this year, regardless it will remain larger than it was pre-crisis, inflation is sluggish due to one-off events, the Fed is near its equilibrium rate and we may not need too much more in the way of interest rate hikes.

Asian markets down ahead of the news, closing well before she made her way to Capitol Hill. Austalia led with a loss near -1.0% but other markets saw much smaller declines. European indices were lower early but closed with Yellen driven gains. Most indices gained more than 1% with many in the range of 1.5%.

Market Statistics

Futures trading was positive all morning and gained some strength going into the open. The open was bullish. The SPX gained 10 points at the get-go and moved up from there. Intraday high was hit just before 10:30 with the SPX rising nearly 20 points or 0.75%. This top held for the better part of the day with the index trending in a tight range just below it. The Beige Book release at 2PM was good and helped support the market but was not able to push it to new intraday highs. The market held near the highs all day, where they remained until the close.

Economic Calendar

The Economy

Very little economic data today but it was bullish. The Fed's Beige Book shows growth in all 12 regions,modest to moderate growth in 11. The Pennsylvania district was the weakest with only slight growth. The report also shows that labor markets are tightening and contributing to wage growth. Inflationary pressure is present but not enough to warrant rate hikes.

The Dollar Index

The dollar was mixed today. The Dollar Index moved both higher and lower to create a small doji candle. The candle is sitting just above $95.50 and a confirmation of near term support. Janet Yellen's comments were largely to blame as they seemed to support strengthening economic conditions and quash interest rate expectations at the same time. The indicators are bearish but also mixed. Bearish MACD is in retreat and fast approaching the zero line, consistent with support, while stochastic is pointing lower but also showing evidence of support at this level. A bounce from here would be bullish but not likely to go very far without some tailwind to push it. A break below this level would be bearish and trend following with targets near $95 and $94. Longer term it looks like the index is going to remain range bound. Positive data will be bullish for the dollar but it will need to be strong, and stronger than European data, in order to overcome the strengthening euro.


The Gold Index

Gold prices were equally mixed. The spot price fell a few dollar in early trading and then reversed to gain nearly a half percent by settlement. First target for resistance was near $1,220 and broken today. If the metal is able to move higher next target is near $1,235. For the next few weeks, until the July FOMC meeting, gold prices are likely to drift on economic data and political risk.

The Gold Miners ETF GDX gained about a half percent on the news but the move does not look overly bullish. The ETF gapped up at the open to begin trading near the short-term moving average. Resistance selling took over from there and drove prices lower creating a red bodied candle falling from resistance. The indicators do not agree and may in fact be indicating a buy, the caveat is that the ETF has been trading in a narrowing range for more than 6 months and they are more consistent with that than anything else. The next potential catalysts for break-out are PPI and CPI released tomorrow and Friday. Support is near $21, resistance near $22, a break of either will be significant and bring short term moves of $2.50 to $.300. Downside target is near $18.50, upside target is near $25.00.


The Oil Index

Oil prices spiked on inventory data. Today's data shows a larger than expected draw of US stockpiles which drove WTI up more than 1.5%. While bullish today the news does not alter underlying fundamental conditions. Oil may continue to percolate to the upside but supply, production and capacity will continue to overshadow the market into the long term.

The Oil Index spiked today as well only it did not hold the gains. The index gained more than 1.25% intraday only to fall back from resistance. Resistance is at the short term moving average, just below 1,120, and confirmed by today's candle. The candle is a tombstone type doji and possible shooting star and if so, is consistent with the current trend. A move lower would be trend following with downside target near 1,090. A move below that will depend on earnings and forward outlook. With oil prices down forward outlook will take a hit. So long as it remains positive my longer term outlook will remain bullish, near and short term will depend on how positive the outlook is.


In The News, Story Stocks and Earnings

Amazon is expected to break records with Prime Day. According to a press release from the company sales grew 60% over last year. The number of Prime members making a purchase increased more than 50% to total in the tens of millions and the number of new Prime registrations was the largest in history. And the stock rose by nearly 1.25% to move above the $1,000 to close just below the current all time high.


Fastenal, supplier of screws blades and other bits of construction related sundries, reported earnings this morning. The company beat on the top and bottom lines but the stock closed with a loss of nearly -2.0%. Earnings grew by more than 15% over last year on improving sales across all product lines. The bad news, and not really bad considering business in general is improving, is that they are closing stores. My thought is if the stores aren't making money then why keep them open? Shares opened with a nice gap of nearly 6% but selling took over and drove shares lower throughout the day. On a side note the company was also upgraded to Outperform at Baird.


The VIX fell more than -5% to fall below the $11 and close near $10.25. This action is consistent with a return to rally and a very positive sign as we approach the onset of earnings season. The indicators remains consistent with sideways trading at current levels with a bias to the downside. Downside target is $10 and just below at the current long term low.


The Indices

The indices moved higher. The move was led by the Dow Jones Transportation Average. It gained 1.21.% and set a new all time high. This is a bullish event but I have some reservations. While stochastic is showing strength with a crossover of the upper signal line MACD momentum is diverging from the high. This may be nothing but is a red flag to be wary of. The signal is bullish but I would not be surprised to see the index hit a near term top in the near future. Upside target is near 10,000 in the near term, support is at the previous all time high.


The NASDAQ Composite made the second largest gain today. The tech heavy index gapped up at the open by roughly 0.5% and extended the gain to 1.09%. The indicators confirm the move with today's MACD crossover with an upside target at the current all time high near 6,350.


The S&P 500 comes in third today with a gain of 0.73%. The broad market index made a small gap up at the open and moved higher from there to create a medium sized green candle. The move is confirmed by stochastic but not MACD, the MACD crossover is imminent but not guaranteed. Upside target is the current all time high near 2,450. Resistance at this level may be strong as it is coincident with the underside of my long term up trend line. A break to new highs would be additionally bullish.


The Dow Jones Industrial Average also made a small gap up at the open. The blue chips are on the rise and confirmed by stochastic with a strong buy. This signal is yet to be confirmed by MACD but that signal is at hand. Today's action set new all time closing and intraday highs capped by technical resistance. Resistance is just above today's close at my long term up trend line. A break above the trend line would be bullish. Upside target is near 22,500 in the short term, 22,000 in the nearer.


The market is on the move driven by earnings, earnings expectations and earnings outlook. Today's comments from Janet Yellen went a long way toward paving a smooth path for the rally to roll forward on. From where I sit it sounded a lot to me like the Fed thinks economy is OK, that policy is nearly normalized and we can expect things to remain as they are for some time to come. This may mean the Fed is finally exiting center stage so the market can focus on what the market is all about, the economy business and earnings. All we have to worry about now is The Great Unwind and whatever that brings us. Until then I am cautiously bullish in the near term and still firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes


New Plays

Going Out of Business Sale

by Jim Brown

Click here to email Jim Brown
Editor's Note

Shares are going on sale as this restaurant chain struggles for survival. They closed 10% of their stores and are on track to close more. Same store sales are dropping fast.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

FRGI - Fiesta Restaurant Group - Company Profile

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Sell short FRGI shares, currently $18.80, initial stop loss $20.35.
Alternate position: Buy September $17.50 put, currently $1.05, initial stop loss $20.35.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.



In Play Updates and Reviews

New Dow High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Yellen short squeeze powered the Dow to a new high and lifted the other indexes above resistance. The Dow closed at a new high by 4 points, a very slim margin for a 21,500 point index. There is always the risk that this becomes a double top but I am not seeing that possibility today. The Nasdaq closed well above prior resistance and above 6,250 and the resistance from late June. Thursday will be a critical day for the Nasdaq. If it can add a few more points, we could see some real short covering begin. If it falls back below 6,250 it will be back in the recent congestion range.

The Russell traded in new high territory intraday but closed 2 points below that prior high. The S&P closed just over resistance at 2,440 by 3 points. The markets are poised to move higher but the margin of bullishness at the close was very narrow. We could still go either 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


PPC - Pilgrims Pride
The short position was stopped at $21.15.



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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Only a minor gain but the trend is still intact.

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:

No specific news. Shares closed at a new high.

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.

Update 7/11/17: 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.

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:

Cara spiked at the open on positive results on an early-stage trial of a treatment for chronic kidney disease-associated pruritus or CKD-aP. The company is expecting to begin a later stage test before the end of the year. Shares spiked to $14.26 at the open and faded to give back $1 of the gains. This was a short squeeze on the news and hopefully the prior trend will return on Thursday.

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 continued 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. Major short squeeze at the open to stop us out for a minor gain. Since there was no news, this may have been just a squeeze related to the gains in the broader market. If it rolls over I will short it again.

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:

Closed 7/12/17: Short PPC shares @ $22.30, exit $21.15, +$1.15 gain.
Alternate position:
Closed 7/12/17: Long Aug $21 put @ .60, exit .73, +.13 gain.



SHLD - Sears Holdings - Company Profile

Comments:

No specific news. No shorts running for the exits on Sears. Shares only rose 29 cents in the strong market open and gave it all back by the close.

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:

Big market gain, big VXX decline. Now only 13 cents from a new low.

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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