Option Investor

Daily Newsletter, Wednesday, 11/9/2016

Table of Contents

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

Market Wrap

Global Markets Get Trumped

by Thomas Hughes

Click here to email Thomas Hughes


I go to bed thinking Hillary is probably going to win, I wake up at 1AM to feed the baby and the world has gone all topsy turvy after getting Trumped. After seeing the results it's very hard to believe the media, the race wasn't even close. Now it's time, as Jamie Dimon so eloquently put it in a memo to his staff, for all American patriots to come together in open dialogue while we navigate these uncertain times. America will survive and there is hope for the future. Now that Mr. Trump is President-Elect Trump the pundits are seriously talking about his plans and the chances he just might be able to kick the economy into a higher gear.

Asian markets closed lower, they were closed before the relief portion of today's price action set in, but I do expect to see them rise in the overnight session tonight. European market action more closely matched our own, falling sharply in the early hours only to reverse those losses and turn them into gains near 1.5%.

Market Statistics

The news was shocking to say the least. The global market sold off hard on TrumpenFear, the Dow futures hitting a low greater than -800 points in the overnight session, but it didn't last. I'd suspected there could be a Brexit-like bounce following the election, I just didn't think it would happen on the first day. By 9:30AM eastern time the market had largely recovered the early losses and was able to open with barely a tick of movement from yesterday's close. The first two hours of trading was a bit volatile as traders scooped up bargains where they could, the indices hovering around break even. By 11AM the market had fully shrugged off the early bearishness and committed to extending the week's rally. The market rose the rest of the day, gaining more than 1%, to close near the highs of the day.

Economic Calendar

The Economy

Economic data was light today and probably a good thing, it would have been lost in the election story. The mortgage index fell -1.20% for the second week in a row as prospective home owners shy away from higher rates. Over the past 4 weeks the index has fallen a little more than -11%, the rate on a 30 year fixed is hovering around 3.75%

Wholesale inventories were revised down to 0.1% from 0.2% for the September reading. Ex-Auto's, an important factor in GDP, rose 0.4%. Investment in inventory rose by 0.6% while sales at the wholesales rose 0.2%.

There are only two economic reports of any importance left this week, the jobless claims data tomorrow and Michigan Sentiment on Friday.

The Dollar Index

The Dollar Index went on a wicked wild ride just like the equities markets and seems to be confirming support and a return to recent highs. The index fell more than -5% in the overnight session as the Trump news washed over the market only to rebound and close with gains near 0.75%. Price action fell to touch the 50% retracement line where they bounced, creating a large white candle with extremely long lower shadow. This candle qualifies as a hammer and confirms support at level. The indicators are rolling over into a buy signal, in line with the generally bullish outlook for the dollar, but have not confirmed so there could be some more sideways movement within near term trading ranges. Support looks strong at $97.20, resistance may come into play around the $99 level.

The CME Fed Watch Tool is still showing a 76% chance of rate hike at the next meeting.

The real story is the Mexican peso which fell -7.5% to a record low, if you have any desire to go to Mexico, buy anything from Mexico or buy into Mexico now is a really cheap time to do it.

The Oil Index

Oil prices were as volatile as anything else in today's session, making a 5% swing in the early hours to test support and then bounce back and move into positive territory. Support appears to be in the $44 range for WTI which closed above $45 with a gain near 1%. $45 may be the sweet spot for WTI, be on the lookout for news that may swing it one way or the other.

The Oil Index gained nearly 1.5% and created a long white candle. Despite this, and the rise in oil prices, the index remains range bound. Today's action looks bullish and may take the index up to the upper range boundary near 1,180 but will likely not break through unless oil prices are able to break above $50. The indicators are consistent with a shift of momentum within the range, and with the trading range in general, but are not strong or indicative of imminent break out.

The Gold Index

Gold prices skyrocketed on a weakened dollar only to slam into resistance above $1,300 and come crashing back to earth. Spot price went as high as $1,338 in the overnight session but fell back to $1,276 by settlement time. Today's action created an incredibly long upper shadow, confirming resistance at the $1,300 level, and could lead to further downside. Considering that FOMC outlook looks firm for a December rate hike the dollar is likely to remain firm if not move higher and pressure gold back to support. Support target is near $1,250, a break below that could go as low as $1,200 in the near term.

The Gold Miners ETF managed to close today's session with a gain but the candle and indications are all bearish. Today's candle is a long black candle and the third confirmation of resistance at/near the $25 level. The indicators are mixed; stochastic has confirmed with a strong signal while MACD has yet to reach and cross the zero line. Today's close is below support targets at the short term moving average and the 50% retracement level, next downside target is near $22.50.

In The News, Story Stocks and Earnings

Fear has left the market, more or less. Now that the election is over a certain amount of uncertainty has left, there is still some because the Trump administration is a wild card, and the VIX has responded. The index fell -20% after a moderately higher opening to hit the lowest level since before the 11th hour FBI email revelation. Today's action left it sitting just above the $14.75 level and looking like it will continue to fall back toward low levels near $12.50.

The Health Care Sector got a big pop, nearly 4%, on the hopes that the unaffordable care act will get fixed, repealed, corrected or something. Matching this was a similar move in the health insurers which gained 3% to 4% on average, led by Cigna's near 5% gain. The real star of the health care complex was Magellan which also happened to report earnings before the bell. The Company reported earnings that beat on the top and bottom lines and raised full year guidance to range whose low end is 4% above the previous guidance and 20% above the consensus estimate. Shares of the stock soared nearly 18% on the news.

Mylan reported after the bell. The company was expected to report year over year growth in both revenue and earnings and delivered one out of two. Revenue grew 13% year over year while adjusted earnings came in down -3%. Headline GAAP earnings per share was a loss of -$0.23 due mainly to epipen issues, and some other issues plaguing the company. Shares had been up as much as 7% during the day, closed with a gain near 5%, and then fluctuated around those levels in the after hours.

The Indices

Today's action really was a tale of two markets. The early, overnight, preopening session was nothing but bloodshed and carnage; the indices fell more than 5% and looked like the onset of serious selling. The surprising thing was that it just didn't last, as soon as the Trump victory was secured futures began to rise and kept rising into the open of the session and throughout the day. The star of today's show was the Dow Jones Industrial Average which gained about 1.70% and tickled a new all time high. The blue chips created the longest white candle in many many years. Today's range was nearly 800 points and that is not counting the deepest of the overnight losses. The candle is strong, moving up from the long term up trend line, breaking through to a new high, and is confirmed by both indicators. Looks like a pretty strong buy signal to me although tomorrow may not be the best day to go rushing in.

The Dow Jones Transportation Average made the smallest gains in today's session, only about 1%, but managed to make a new high relative to its recently broken trading range. The transports extended their break to new long term highs and are confirmed by the indicators. Next upside target is near 8,500.

The S&P 500 made the second biggest gain today, nearly 1.25%, after losing more than -5% in the pre-opening session. The index created a large white candle moving up from the 2,120 support line and a long term up trend line. Today's action took the index up above the short term moving average to approach the current all time high and is confirmed by the indicators. The all time high is less than 1.5% above today's close and could be easily reached this week if upside momentum continues.

The tech heavy NASDAQ Composite made the third smallest gain today, near 1%, but is also quickly approaching the current all time high. The index created a long white candle and close above the short term moving average and a previous all time high. The indicators are rolling over and beginning to confirm the move although it is not complete. Next target is the current all time high, near 5,340, a break above that would be bullish.

Today wasn't so much about Trump as it was about the election. The uncertainty is mostly over, instead of two wildly different agendas that may or may not be the future, we've got one agenda to focus on the possibilities it brings. In terms of the market, business and the economy... I'm hopeful.

From a business perspective I can understand how the thought of tariffs on goods returning to the States is concerning. Mitigating that I think is the chance to repatriate off-shore earnings at a reasonable tax rate and a more competitive corporate tax rate here at home, both of which will help free up cash for investment and growth. At the same time, a more competitive tax rate and the possibilities of tariffs would preclude the need for inversions and may even entice some US businesses to bring production of goods intended for the US market back to the US. I just heard a fellow on TV estimate that a 15% corporate tax rate could boost S&P 500 earnings growth by 18% all by itself, think about that for a minute.

Today's action was very positive in my opinion and just may be the signal I've been waiting for. The indices are making a strong bounce from support levels near/at long term trend lines, supported by economic trends and earnings outlook with the very real possibility Trump could unlock the economy and unleash growth. I'm still cautious but it's time for me to start nibbling when the opportunities present themselves.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Election Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's election results favored not only Trump but also other measures on ballots all across the country. It was not just a presidential election as many states had numerous other measures on the ballots.


SMG - Scotts Miracle Grow - Company Profile

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide. The company's Global Consumer segment offers lawn fertilizers, grass seed products, spreaders, other durable products, and outdoor cleaners, as well as lawn-related weed, pest, and disease control products; water soluble and continuous-release plant foods, potting mixes, garden soils, mulch and decorative groundcover products, landscape weed prevention products, plant-related pest and disease control products, organic garden products, live goods and seeding solutions, and hydroponic gardening products; and insect and rodent control products, and selective and non-selective weed control products to protect homes and maintain external home areas. This segment provides its products primarily under the Scotts, Turf Builder, EZ Seed, Water Smart, PatchMaster, EverGreen, Fertiligene, Substral, Miracle-Gro Patch Magic, Weedol, Pathclear, KB, Celaflor, EdgeGuard, Snap, Handy Green II, OxiClean, Miracle-Gro, Osmocote, Hyponex, Earthgro, SuperSoil, Ortho, Miracle-Gro Organic Choice, Nature's Care, Whitney Farms, EcoScraps, General Hydroponics, AeroGarden, Substral, ASEF, Scotts EcoSense, Naturen, Fafard, Tomcat, Roundup, Groundclear, Nexa Lotte, and Home Defence brand names. Its Scotts LawnService segment offers residential and commercial lawn care, tree and shrub care, and pest control services through the periodic applications of fertilizer and control products. Company description from FinViz.com.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

There are two ways to play this. The stock closed at $90.45 so the $90 strikes are slightly in the money and expensive. The December $95 strike is 95 cents. I like the price but there are only 37 days for the stock to move $5. There is no January strike. The next available is March at $2.85. I have a lot of confidence that SMG will be over $95 before their earnings on Feb 2nd. I am recommending we use the March strike and there will still be a lot of expectation built into the premium when we exit before earnings. I am recommending the March strike. We are buying time but we are not going to use it.

Also, the spread is 50 cents in the March option so the stop loss will be wide until we get closer to the money and that spread will narrow.

Buy March $95 call, currently $2.85, stop loss $86.25.


No New Bearish Plays

In Play Updates and Reviews

That Was Unexpected

by Jim Brown

Click here to email Jim Brown

Editors Note:

I told everyone to buy any post election dip but this was one for the record books. With the Dow futures down to 17,418 at midnight at -869 points, it appeared we were in for a no good, terribly rotten day on Wednesday. After Clinton conceded and Trump gave his acceptance speech, the rebound began and the futures rallied to hit 18,539 intraday, a +1,121 point rebound.

A monster short squeeze was born and equities exploded higher. The Dow traded at a new intraday high before fading slightly at the close. There were $1.4 billion in sell on close orders on the NYSE.

This means the market could be a challenge on Thursday. The three day rebound has added has added +700 points for the Dow and it closed right at historic resistance. While I would like to see it continue higher, I strongly suspect we will see some profit taking before that happens. The S&P futures are down -5 as I type this but that is minimal given the market movement on Wednesday.

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

No Changes

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

HON - Honeywell - Company Profile


No specific news. New five-week high.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

Position 10/17/16:

Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Profile


This was a speculative position on the potential for a post election bounce. The 3% gain today was outstanding given the overnight market.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, no initial stop loss.

TREE - Lending Tree - Company Profile


No specific news. Big 5% gain but dead stop on downtrend resistance. The $90 level is critical but with a positive market I think it will break through.

Original Trade Description: October 31st.

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Position 11/1/16:

Long Dec $85 call @ $4.00, see portfolio graphic for stop loss.

XBI - Biotech ETF ETF Profile


The XBI rallied more than 10% on Clinton's loss and the gains are probably not over. With the Republicans holding the house, senate and White House there will not be an drug price controls.

Original Trade Description: October 29th.

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $56 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

Position 11/8/16 with a XBI trade at $58

long Jan $60 call @ $2.37, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

SRG - Seritage Growth Properties - Company Profile


No specific news. Shares only rebounded 40 cents in a wildly bullish market and that suggests nobody was covering their shorts and nobody was jumping into SRG shares because they thought it was a good investment.

Original Trade Description: November 7th.

Seritage Growth Properties (Seritage) is a self-administered and self-managed real estate investment trust (REIT). The Company is engaged in the acquisition, ownership, development, redevelopment, and management and leasing of diversified retail real estate across the United States. The Company's assets are held by and its operations are primarily conducted through directly or indirectly, by Seritage Growth Properties, L.P. Its portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Its portfolio includes over 3,000 acres of land, or approximately 10 acres per site for its owned properties. The Company's portfolio include approximately 42.4 million square feet of gross leasable area (GLA), which consists of approximately 230 owned properties totaling over 37.0 million square feet of GLA across approximately 49 states and Puerto Rico and interests in approximately 30 joint venture properties totaling over 5.4 million square feet of GLA across approximately 17 states. Company description from Reuters.com.

When Seritage was spun off from Sears it held about 230 properties with either a Sears store or a Kmart as the anchor tenant. Almost immediately, Sears began serving notice of intent to terminate leases. In September, Sears notified Seritage it was terminating 17 more properties. These properties are normally older malls with Sears of Kmart as the anchor tenant. Once Sears or Kmart leaves, the malls have a good chance of dying.

Seritage is rapidly remodeling and trying to release these malls and strip centers. However, in their recent earnings they disclosed the average rent before Sears/Kmart terminated was $19.25 per square foot. The average rent they are receiving after those anchor stores leave is now $13.75 per square foot.

There are two big challenges. The first is the death of the mall. Average rents are going to deteriorate until the mall finally closes. Numerous malls have already been shutdown and bulldozed to make way for office buildings of some type. That is not bad for Seritage since each center they own averages about 10 acres. However, they cannot just terminate all the leases just because Sears terminates. They will try to replace the anchor tenant and continue to operate as a mall as long as possible but income will continue to decline.

The second challenge is the current weakness in the Sears/Kmart business. There is a constant stream of rumors that Kmart will file bankruptcy after the holidays. Some distributors are no longer shipping them product for fear of not being paid.

Since the majority of Seritage properties are occupied by Sears/Kmart they are at extreme risk for further declines in those retail businesses.

Earnings Feb 2nd.

Update 11/7/16: Boenning & Scattergood reiterated an underperform rating saying SRG was seriously over valued and would have to raise significantly more capital in order to remodel the 1.7 million square feet of space Sears is terminating in January. They believe SRG is currently valued at 27% over net asset value and that will be worse when they announce a secondary offering.

Monday's market rally lifted Seritage from a 7-month low but shares only managed to gain 26 cents. If the prior decline continues it should return to the lows and test $40 in the weeks ahead. I am recommending an April option to get us past any January closing announcements by Sears.

Position 11//8/16:

Long April $40 put @ $2.37, see portfolio graphic for stop loss.

VXX - VIX Futures ETF - Company Profile


Heading back to a new low if the market remains positive.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

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 down 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.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.

YHOO - Yahoo - Company Profile


Shares rallied off the morning lows but gained only 5 cents for the day. The WSJ is reporting that Yahoo is investigating to see if the hackers from the prior cyberattack have access to users accounts. Apparently, there is some new concern that they can access the accounts and get the credit card info. This is another blow for the proposed Yahoo/Verizon merger.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 10/17/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

YUM - YUM Brands - Company Profile


No specific news. Still holding just under resistance after a big rebound from the opening dip. Shares still closed with a loss in a bullish market.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now