Option Investor

Daily Newsletter, Saturday, 8/13/2016

Table of Contents

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

Market Wrap

Volume Drought

by Jim Brown

Click here to email Jim Brown

It was definitely a summer Friday with volume very low despite the major indexes at historic highs.

Weekly Statistics

Friday Statistics

Friday's volume fell to 5.5 billion shares to round out a very light week that averaged only 5.894 billion shares per day. You would not have known it was a record week on the indexes by their gains for the week. The S&P gained only 1 point for the week, Nasdaq Composite 12 points and Dow 33 points. That is not the kind of market movement that inspires bullish confidence.

The economic reports on Friday should have been positive for the market. The bad news should have pushed the Fed even farther into 2017 for the next rate hike. The bad news started with the Producer Price Index for July.

The headline inflation at the producer level fell -0.4% compared to a rise of +0.5% in June and expectations for a rise of +0.1%. This was the first decline since March. Inflation in food prices fell -1.1% and energy prices fell -1.0%. The core rate excluding those items was flat at zero for the second month. If you do not eat or use energy, your inflation rate for July was zero. The rest of us saw a price cut.

Inflation for services fell -0.3% and the biggest drop since March. Inflation for personal consumption items fell -0.4%. Processed energy goods prices rose +0.8% even though energy prices were falling in July.

The drop in inflation at the producer level will be a concern for the Fed and will probably put the rate hike hawks back in their cages for the September meeting.

The Retail Sales report for July was also bad news. Headline sales growth was flat at zero compared to a +0.8% rise in June. Analysts were looking for a 0.4% rise. It should be noted that Amazon's Prime Day shopping spree was in July and even that did not lift overall sales for the month.

The nonstore sales category did rise +1.3% because of Prime Day but it could not offset declines elsewhere. Gasoline stations saw sales decline -2.7% due to falling gas prices. If you exclude this category, the overall core sales would have improved slightly to only -0.1% decline. Sales at sporting goods stores fell -2.2%, grocery stores -0.9%, general merchandise -0.1%, clothing -0.5%, food service/drinking -0.2%, electronics and appliances -0.1%, building materials -0.5% and food & beverages -0.6%. Autos and auto parts was the big gainer at +1.1% growth.

This is going to be a challenge for the Fed. I am sure in Yellen's Jackson Hole speech she will say these items are "transient" and will eventually show growth because consumer was the main driver in Q2-GDP. However, the retail sales reports we saw last week showed that every retailer saw revenue declines as consumers keep their money in their pocket.

The uncertainty of the election cycle is causing all kinds of ripples in the economy. Wendy's and Shake Shack both warned the election cycle was slowing sales of fast food.

Consumer sentiment for August rose only slightly from 90.0 to 90.4 compared to analyst estimates at 91.5. The current conditions component fell from 109.0 to 106.1 but the six-month expectations component rose from 77.8 to 80.3. Apparently, some people believe the political rhetoric about the good things they are going to do for jobs and the economy when they are elected. Those people need a course in government since promises rarely come true and if they do, it is normally years later.

The longer-term path on this chart is lower. Sentiment has been weakening for the last year since the high in January 2015 at 98.1. However, record low mortgage rates are providing support to sentiment or the chart would be a lot worse.

The economic calendar for next week has the FOMC minutes of the last meeting and the Philly Fed Manufacturing Survey. The minutes will be a critical inflection point for understanding Fed policy and how the weak economic data might impact their thinking for the September meeting.

The Philly Fed survey is seen as a proxy for the national ISM report due out in two weeks. If the Philly survey is weak then the ISM is expected to be weak. Analysts are expecting some improvement in the Philly survey from the -2.9 reading in July to a +1.5 for August. Given the recent economic reports, they may be setting their sights a little high for this one.

The Fed's Jackson Hole meeting the following week is always a weak point for the market. When you get that many Fed heads together in one place it is a target rich environment for reporters always looking for that next sound bite that could rock the market. Finding a Fed head accidentally afflicted with foot in mouth disease is always a plus.

It was a quiet day for earnings as the cycle comes to a close. JC Penny's (JCP) reported a loss of 5 cents compared to estimates for a loss of 15 cents. That was significantly better than the loss of 40 cents in the year ago quarter.

Revenue of $2.918 billion missed estimates for $2.933 billion but sales did increase 1.5% over the year ago quarter. Same store sales rose 2.2% after a -0.4% decline in Q1. They ended the quarter with $429 million in cash and $2.981 billion in inventory. The company guided to same store sale growth of 3-4% for the full year and for margins to rise 10-30 basis points. EBITDA is expected at about $1 billion. The company said they were seeing a sharp rise in business at malls where Sears and Macy's were closing stores.

Shares spiked on Thursday on some of the other retail earnings but rose another 6% on Friday on the better than expected report.

Ruby Tuesday (RT) reported earnings of 7 cents on revenue of $296.81 million. Same store sales fell -1.4%. The CEO said, "Our quarter was impacted by the softness in the casual dining industry and increased promotional activity by our peers. Given that we expect the macro environment to remain challenging for some time, we are taking the necessary steps to change the trajectory of our business." The company said it plans to close 95 underperforming restaurants by Sept 5th. Today they have 724 stores in operation. They guided to full year earnings of 5-9 cents and same store sales to be flat to up 2%. They may also close another 5-10 stores as leases expire.

Are we starting to see a pattern here? Nearly all of the restaurants reporting earnings are complaining about weak traffic and all have to resort to discounts and special promotions just to maintain prior sales levels. What does this say about the U.S. economy in general? If consumers cannot afford a hamburger, the economy is not headed in the right direction.

Applied Industrial (AIT) reported earnings of 66 cents that matched estimates. Revenue fell -6.4% to $634 million that missed estimates for $642 million. They guided for full year earnings of $2.40-$2.60 and analysts were expecting $2.66. Shares dropped -5% on the news.

Concordia International (CXRX) reported earnings of $1.38 compared to estimates for $1.42. Revenue was in line with estimates. However, they lowered full year guidance to $859-$888 million compared to estimates for $939 million. They guided for earnings of $510-$540 million and analysts were expecting $575 million. The company also suspended their 7.5-cent dividend in favor of using the money for "long-term value-creating initiatives or debt repayment." The stock crashed -38% on the news.

Acacia Communications (ACIA) reported earnings of 77 cents and revenue of $116 million. Analysts were expecting 30 cents and $85.8 million. Yes, that is not a misprint. They knocked the earnings ball out of the park. Even gross margin rose from 41.9% to 47% and well above the year ago level of 35%. They guided for the current quarter for revenue in the $120-$128 range and earnings of 64-76 cents. Analysts were expecting $92 million and 43 cents. Shares rallied 41% on the news. This company just came public at $30 three months ago and shares hit $98 on Friday.

With 91% of the S&P having reported earnings, the blended decline is now -3.5%. The blended revenue decline is now -0.2% and slightly better than the -0.8% forecast at the end of June. This is the first time the S&P has recorded five consecutive quarters of earnings declines since 2008-2009. This is the sixth consecutive quarter of revenue declines. Of those reporting 70% have beaten on earnings and 54% have beaten on revenue. On June 30th, the forecast was for a -5.5% decline according to FactSet. For Q3, 62 companies have issued negative guidance and 28 companies have issued positive guidance as of Friday.

The trailing 12-month PE is now 19.5 and the highest level since 2010. On December 31st, the trailing PE was 17.9. The forward PE is 17.1 based on the 12-month EPS estimate of $128.11.

Q3 earnings are currently expected to show a decline of -2.0% but Q4 is expected to show earnings growth of 5.5%. Revenue is expected to rise 2.2% in Q3 and 4.9% in Q4. The improvements in both metrics are due to easier comps from the same periods in 2015.

It would appear we have turned the corner in earnings. Typically, earnings come in better than the prediction as earnings surprises appear. That suggests the actual earnings decline in Q3 to be around 1% followed by close to 6% growth in Q4. If you were going to buy stocks, you would like to buy them as they rebound from an earnings recession. That means dips are likely to be bought over the next six weeks.

The earnings calendar for next week is retail oriented once again with DKS, URBN, AEO, HD, LOW, SPLS, TGT, GPD, ROST, SHLD, WMT, FL and HIBB. That is a heavy dose of retail earnings that could further build the case for consumer health or a continued decline.

The last three Dow components report. Those are HD, CSCO and WMT. They are not likely to move the Dow needle unless they post significantly stronger numbers than expected. Home Depot would be my pick for an upside move and CSCO/WMT a tossup for a downside move.

Hewlett Packard Enterprise (HPE) said it was buying Silicon Graphics (SGI) for $275 million or $7.75 per share. This is a great deal for HPE and a good deal for SGI as well. That was a 30% premium and they will do much better under the HPE umbrella. SGI makes high performance computers and the addition will complement HPE's big computer business.

Hain Celestial (HAIN) exploded higher on Friday on no news. Option volume is typically 1,300 contracts a day. By noon, they had traded over 13,000 and by the close, more than 55,000 call contracts traded. Average daily stock volume is 1.2 million shares and they traded 6.5 million on Friday. They report earnings next Thursday but the rumor was a possible acquisition to be announced next week.

Yahoo shares surged 4% to a 52-week high on Friday after blowout earnings by Alibaba caused a $13 surge in BABA shares over the last three days. Yahoo owns 15% of Alibaba, currently worth more than $36 billion. Yahoo's market cap at the close on Friday was $41 billion. Even after Verizon pays roughly $5 billion for the Yahoo core assets, there is still a lot of value left in the corporate shell. Yahoo still owns 35% of Yahoo Japan and that stake is valued at roughly $9 billion. Unlike Yahoo USA, Yahoo Japan has produced record revenue and profits for 18 consecutive years.

The Japanese portal produces more than 4,000 articles a day from its contributors and 300 media partners, has a multitude of online services including a credit-card business, a video on demand service and dozens of popular mobile apps. They generate 63 billion page views a month. They pay roughly $236 million a year to Yahoo USA for licensing and technology. If Marissa Mayer had just copied Yahoo Japan she would be flying high today instead of on her way out the door. Softbank owns 43% of Yahoo Japan.

In a SEC 13-F filing, David Tepper's Appaloosa hedge fund sold $500 million in SPY calls. They added $68 million in shares of WDC, $117 million of Atlantica (ABY) and sold all $418 million in Delta (DAL) and cut their Southwest (LUV) stake by 20%. The fund increased their stake in Allergan (AGN) from $75 million to $300 million. They sold all 1.6 million shares of Facebook (FB), 7.0 million shares of Bank of America (BAC), 2.5 million shares of Pfizer (PFE) and 1.3 million shares Cabot Oil & Gas (COG). Overall, he reduced his stock holdings by one-third to $3.80 billion, down from $5.66 billion in the prior quarter.

The key point in that paragraph for me is closing the SPY call position. He had more than $500 million in S&P calls and now has only $5 million. That suggests he was not confident the market was going to continue higher. Unfortunately, for him, this 13-F filing was for the end of June and the S&P hit its three-month low on June 27th with the SPY at $198. The ETF closed Friday at $218. Of course, the filing does not say when in Q2 he sold those calls or when he bought them. If he bought them in February he was still a big winner.

Maybe this time it is different. A constant stream of headlines from OPEC members suggest Saudi Arabia is ready to actually support a move to stabilize oil prices. Saudi needs crude back over $50. Their increasing debt levels and declining FX reserves have caused a shift in their thinking. OPEC production is at historically high levels with production of 33.11 mbpd in July. That is the highest level since 2008. It would not hurt anyone to actually freeze production and give the market time for demand growth to catch up to production. It would allow the OPEC countries some breathing room if they could get oil back over $50 and that would give them confidence to maintain a production freeze and try to push prices even higher.

Lastly, Saudi production hit a record 10.67 mbpd in July and analysts claim they are pretty close to being at their max production capability. That is another reason to support a freeze. If they cannot produce any more but Iran and Iraq can, then not having a freeze would let those countries continue to grow and win back market share. This time it is different for Saudi Arabia and once they say they will support a freeze, the prices will be over $50 very quickly. It is amazing how quickly the OPEC members turned around the expectations for further declines under $40 after Labor Day. Once the chatter began in earnest, the prices rebounded very quickly.

U.S. producers must believe in the chatter as well. The active rig count rose by 17 rigs last week and 15 of those were oil rigs. That pushes the total oil rigs reactivated to 66 over the last 7 weeks. Obviously, there is a long way to go to get back to prior levels but this is a fast start. U.S. production has declined -1.165 mbpd since early 2015. Current production is 8.45 mbpd and that has not gone down since the low of 8.428 mbpd for the week of July 1st. Production is not rebounding but has apparently found the bottom. Multiple U.S. producers guided for higher production in the second half of 2016 despite the low prices. If prices suddenly rocket past $50 on more OPEC chatter, we could see dozens of rigs reactivated each week.




The Nasdaq has posted gains for seven consecutive weeks and that has not happened since 2012. The Nasdaq can thank the biotech stocks and the semiconductor sector for those gains.

Despite that admirable winning streak, the index is still only 14 points over the prior historic high of 5,218 in July 2015. The big question today is whether the Nasdaq and the supporting cast can extend those gains after a 7-week sprint. There have been negative days in that streak but very few and very minor. Whenever we see a streak like that on any stock or index that matches a prior high, the bearish sentiment begins to flow out of the investing forest.

This is the equivalent of standing next to a roulette table and seeing red come up 7 spins in a row. The obvious expectation is that the next spin or at least over the next several spins a black number will appear. I have seen a lot of money won and lost betting those color streaks will come to an end.

I have done it a lot at the craps table. If somebody throws 5 or 6 sevens in a row, I am definitely throwing down black chips to bet against the shooter.

In casino table games, the law of averages always prevails. In the market, those laws do not apply regardless of how much we want to bet with/against them. The market can always continue a streak far longer than we can remain liquid betting against that streak.

For every 1,000 investors betting the Nasdaq cannot go higher, there is another 1,000 betting it will. What decides the outcome is the size of the bets on either side. If I am betting against a continued streak, I can easily become road kill. If David Tepper is betting against it with $500 million in SPY calls/puts, etc, then the market is likely to go in his favor because his volume far outweighs my volume and the other 999 investors on my side.

So here is the challenge. We are entering the six most volatile weeks of the year starting the week after August option expiration. Market lows in the second half of the year are typically set in that 6-week period. Are we going to have a lot of portfolio managers bet on that seasonal streak by either closing positions or actively shorting the market or will there be more managers chasing prices higher? Who has the biggest cash hoard and which way are they betting?

I would hesitate to bet against the seasonal weakness but the trend is our friend until it ends. As of Friday's close, the Nasdaq trend was still intact with a new record high. The Dow and S&P posted minor losses but they are still in the game.

I believe we should be observant and not overly long. I would rather keep some cash on hand in anticipation of a dip but keep some invested in case that dip does not come.

Another part of this scenario is that a lot of portfolio managers and individual investors were caught off guard by this rally. I am sure you have heard this was the "most hated rally ever" in the financial press. Bank of America continued a running scorecard of the 17 consecutive weeks of outflows from equities despite the gains in the indexes.

Now everyone who missed out on the rally will be looking for a dip to buy. While that may not happen in any volume before Labor Day, you can bet that any material dip after the holiday will be bought in volume. Portfolio managers will be back from summer vacation and they will have a limited time to post some gains and try to meet their benchmarks and beat their peers. They need to do this to keep their jobs and earn their bonuses. That means the race will be on once the starters gun sounds. We just do not know when that will be.

Remember, Q3 earnings are just expected to be mildly negative but Q4 earnings are expected to grow 5.5%. That means the earnings recession is nearly over and portfolio managers will be bulking up on equities to capitalize on that rebound.

The fly in our soup is the election. The uncertainty is so bad that fast food restaurants are warning of slowing sales in their earnings reports. With 85 or so days until the election, the mudslinging is going to reach a fever pitch. If the polls remain this far apart in the weeks that follow, the uncertainty may fade. When there is an apparent winner weeks ahead of the election the market tends to charge ahead as though the election was already over.

To summarize, the six most volatile weeks of the year begin after option expiration. There is a massive amount of cash on the sidelines and investor sentiment is still mostly neutral/negative. Fund managers are underperforming and they need to suit up with their shoulder pads and running shoes and get in the game after Labor Day. I am looking forward to September and the potential for a real breakout to new highs. (I am sure I am going to get a ton of emails on this outlook. I do welcome your thoughts by email. We have some smart readers and I learn something every week from our subscribers.)

The Nasdaq closed at 5,232 with a 4 point gain and only 14 points over the prior historic high. That is still not a breakout in my book. It is more of a slow motion resistance test. Initial support remains 5,200 and a critical level to watch. Initial resistance is the intraday highs for the last week around 5,235.

The last three Dow components report earnings next week on three different days. The potential for a market-moving event is slim but always possible. The Dow benefitted from the spike in oil prices on Friday with Chevron and Exxon the biggest gainers on the index. The Dow was flirting with the lows at 18,540 when oil started to spike and the short covering in those two names lifted the Dow back to 18,574 at the close.

The index has developed an interesting chart pattern with multiple lines of resistance all converging right at the 18,600 level. The Dow punched through multiple levels of resistance to get to where it is today and a breakout here would set it free. Support is 18,500 and 18,250.

The S&P refuses to decline more than a couple points at a time and then we get one good day that recovers those losses. The long-term resistance that corresponds to the red line on the Dow is roughly 2225-2230 on the S&P. Initial resistance from the last four days of intraday highs is roughly 2,187 with support at 2,150. I do not really see that support breaking without a major change in market sentiment. Anything is always possible but the dip buyers are alive and well.

The Russell 2000 has not made a new high. The current 52-week high is 1,231.75 with the historic high at 1,295. The Russell has not been moving up as strongly over the last four weeks as it did in the first three weeks of the rebound from 1,095. What we have is a scenario where a few big caps are leading the charge and the troops are lagging behind. This needs to change after Labor Day if the market is really going to move significantly higher.

I think I was clear in my commentary. The market has been successful in bucking the normal seasonal weakness but the momentum has slowed significantly. I do expect some volatility to appear but be tempered by some aggressive dip buying the closer we get to Labor Day. Volume should continue to be very anemic and that favors the bulls in this case, which is unusual.

I prefer to refrain from being overly long and I recommend we keep some cash on hand to buy any material dip over the next several weeks.

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Random Thoughts

Sentiment levels were mostly unchanged last week, which is just one more indication investors are not paying attention to the market. Volume remains very anemic and should decline even more over the next two weeks with the exception being option expiration.

Bullish sentiment rose slightly by +1.5% and it came from neutral investors moving off the fence. Bearish sentiment was unchanged. Sentiment will likely remain unchanged until after Labor Day.

The conventional wisdom is that the markets do poorly in late summer in election years. However, there was an article on Friday that pointed out since 1952 the last 7 months of the election cycle was strong in all but two years. In the 16 presidential election years since 1952, the market only declined twice. August was actually a strong month in election years according to this research. I have not seen the actual data behind the article but I have to admit I was surprised at the headlines.

Another study by Kensho found that the Russell 2000, Nasdaq and Dow posted an average gain of only 0.5% in the month after a triple index high like we saw the prior Friday. The S&P averaged a decline of -0.5%. There were 132 triple index highs since 1986.

That study is not encouraging because it suggests stocks tend to flatten out after a triple index high. On the positive side, the energy sector is up an average of 3.17% and was the leading sector. Apparently, the euphoria over new highs suggested oil demand would rise and push prices higher.

The worst sectors were the consumer discretionary (XLY) at -6.48% and the financials (XLF) at -5.78%. The technology sector (XLK) lost -3.66% and the consumer staples (XLP) fell -3.45%.

The flight to safety trades did poorly as you would expect with stocks making new highs. The dollar and ten-year treasury declined about 0.4% but gold averaged a 0.5% gain.

Mark Twain once wrote, "There are three kinds of lies. There are lies, damned lies and statistics." Another person once said "Statistics can be forced to say anything if you beat then long enough." The point here is that averaging the market performance over the last 132 times there was a triple index high is an exercise in futility because our future on this 133rd high has no relation to the past. There are so many factors that go into market highs that it would be impossible to find an exact match in the past to what we are seeing today. Nowhere in the past was there $13 trillion in government bonds yielding a negative interest rate. Never before was the Japanese government buying $1 trillion in stock ETFs. Never before have we had two presidential candidates as equally disliked, each with 61% disapproval ratings.

A Billionaire Census by Wealth-X found that the world's 2,473 billionaires are sitting on $1.7 trillion in cash of about 22.2% of their wealth. The study found that uncertainties in the economy were weighing on billionaire sentiment.

While that may sound like a lot of cash to hoard on a percentage basis a different study by UBS in July found that "wealthy" Americans were keeping around 20% of their wealth in cash. That was equal to the post 2008 average. UBS said many are considering reducing their exposure to the markets because of uncertainty over the presidential elections.

The Wealth-X report said billionaires were waiting for the equity markets to return to more attractive levels before putting the money back to work.

For you Star Wars fans the new trailer for the next installment in the Star Wars series broke this weekend. The "Rogue One" movie will be released by Disney in December. Darth Vader will return in this episode. You can watch it here.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The future depends on what we do in the present, because Tomorrow is often the busiest day of the week."

Mahatma Gandhi

New Plays

Bullish and Bearish

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market refuses to decline but it is also moving up very slowly. We need to be cautious in our play selection and choose stocks with clearly evident trends even in the face of market weakness. The UIS play did not even blink on the two days last week then the market was slightly lower. In a positive market it should shine but even a mildly negative market has had no impact.

I reloaded the VSI short from last week. We were stopped out on a fluke event when all the retailers gapped up on Thursday on the Macy's earnings. One day does not make a trend.


UIS - Unisys Corp - Company Profile

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners. Unisys Corporation was founded in 1886.

Unisys reported Q2 adjusted earnings of 81 cents compared to estimates for 25 cents. Those earnings more than doubled from the 36 cents in Q2-2015. Revenue of $748.9 million easily beat estimates for $688.1 million. Profit margins rose from -6.5% in Q2-2015 to +6.6%. They reaffirmed full year guidance for earnings, revenue, margins and free cash flow. They ended the quarter with an order backlog of $3.8 billion.

Technology revenue rose 30.7% and accounted for 18% of overall revenue. This is going to be a major profit center in future quarters. Profit margins in this unit rose 48%, up from 15.6% in the year ago quarter. Sales of the ClearPath software are soaring.

The Unisys Stealth security product was approved by the NSA for use in classified programs and making the product eligible for use by more than 20 countries to protect super sensitive systems and information.

On Thursday, Unisys won a government contract to move the Treasury Departments Comptroller of the Currency office to the cloud. This will affect more than 4,000 Treasury employees. Earlier in the year Unisys moved the U.S. Dept of the Interior and its SAP-based financial management system to the cloud.

This company is at the right place at the right time with the right security products and the NSA approval opens a tremendous business opportunity in those 20 countries.

Earnings Oct 25th.

Shares spiked to $10.40 on the earnings news and then traded sideways for two weeks. Over the last several days the trend has turned positive and it closed at $10.55 on Friday and a 5-month high.

With a UIS trade at $10.65

Buy UIS shares, initial stop loss $9.65.

No options recommended.


VSI - Vitamin Shoppe - Company Profile


We were stopped out on Thursday at $27.50 when all the retailers spiked up at the open on the Macy's earnings. The spike was quickly sold and the trend should continue lower. I am reinstating this short just under the Friday low of $26.66.

Original Trade Description: August 8th.

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

With a VSI trade at $26.50

Short VSI shares @ $26.50, initial stop loss $27.40.

In Play Updates and Reviews

The Boredom Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's volume of 5.5 billion shares was the lowest day in 2016. New Years Eve was the next lowest at 5.275 billion shares. There is no bullish conviction and from the limited market declines there is no bearish conviction either.

Unless the markets can generate some excitement that produces conviction for the buyers, it is going to be a long August. The next six weeks are the most volatile weeks of the year.

Current Portfolio

Current Position Changes

FDC - First Data
The long position remains unopened until $13.50. High today was $13.41

NAVI - Navient
The long position was stopped out by 3 cents at $13.35.

CUDA - Barracuda Networks
The long recommendation has been cancelled.

RDN - Radian Group
The long position was opened at $13.15. High today was $13.20.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

CDNS - Cadence Design System - Company Profile


Minor loss in a weak market. No specific news.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long CDNS shares @ $24.35, see portfolio graphic for stop loss.

Optional: Long Sept $25 call @ 35 cents, no stop loss.

CUDA - Barracuda Networks - Company Profile


Davidson downgraded the stock from neutral to sell saying it had hit their price target.

This recommendation has been cancelled.

Original Trade Description: July 21st., August 3rd

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher.

We were stopped out of long position on 8/3 because I had the stop loss too tight. I believe CUDA will move higher after a period of consolidation at the current level. I am putting an entry point just over the current consolidation range.

Recommendation cancelled.

FDC - First Data - Company Profile


No specific news. Minor decline in a weak market. Shares still struggling with resistance at $13.35.

This position remains unopened until FDC trades at $13.50. The high today was $13.24.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

With a FDC trade at $13.50

Buy FDC shares, initial stop loss $12.65

Optional: Buy Oct $14 call, currently .55, no stop loss.

NAVI - Navient - Company Profile


No specific news. The long stock position was stopped out by 3 cents at $13.35. The long call position did not have a stop loss and will move to the Lottery play section next week.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long NAVI shares @ 14.57, exit $13.35, -1.22 loss.


Long Oct $15 call @ 50 cents. No initial stop loss.

RDN - Radian Group - Company Profile


Radian finally moved over resistance at $13 to trigger the entry into the position.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.


Buy Sept $14 call, currently .20, no stop loss.

TWTR - Twitter - Company Profile


Twitter declined only slightly in a weak market. That suggests traders are still expecting a news event. Let's hope there is a "merger Monday."

Average daily volume has risen from 22 million to 28 million shares and hit 31 million today. July option volume was 44,000 contracts per day and August volume has risen to 95,000 contracts per day. Steve Ballmer and Prince Al-Waleed bin Talal are still rumored to be acquiring a larger position. Combined they reportedly own 11%.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

BEARISH Play Updates

No Bearish Plays

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.

CIEN - Ciena Corporation - Company Profile


We were stopped out on CIEN on July 28th after INFN posted ugly earnings and warned that demand was falling across the sector. This was mostly company specific to INFN but it did knock CIEN, JNPR and CSCO lower. There was no stop loss on the optional October call so we have retained it as a lottery play that CIEN moves back to the June highs by October expiration.

Original Trade Description: July 23ed.

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.

On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.

After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.

Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.

Earnings are Sept 1st.

I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.

Position 7/25/16

Long Oct $23 call @ 70 cents. No stop loss.

Previously closed 7/28/16: Long CIEN shares@ $20.35, exit $18.84, -1.51 loss.

HOV - Hovnanian Enterprises - Company Profile


HOV announced it was repurchasing all of the 8.625% Senior Notes due in 2017. They extended the deadline for submission to Sept 7th. Reducing debt is always a good sign.

This is a long-term position on expectations HOV will return to profitability in Q3/Q4 as outlined by the CEO in the Q2 earnings.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.


Long February $2 call @ 20 cents. No stop loss.

JKS - Jinko Solar - Company Profile


No specific news. We have a long August $21 call that we added as insurance to the short on JKS shares. Shares appear to have found support at $18 after being downgraded on the 5th. Earnings are before the open on Thursday. I do not expect any surprises but our option expires on Friday. If we do get a spike at the open, I would close the position.

Original Trade Description: July 13th.

JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.

For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.

Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.

Earnings August 18th.

In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.

Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.

Position 7/14/16 with a JKS trade at $19.35

Long August $21 call @ 70 cents, no stop loss.

Previously Closed 7/20/16: Short JKS shares @ $19.35, exit $19.05, +.30 gain.

SHLD - Sears Holding - Company Profile


Shares continued to power high on the various retail earnings. They closed at a 3-month high on Friday. They changed their earnings date from the 18th to the 25th. I am recommending we close the position at the open on Monday. There is strong resistance at $18 and we do not know what the market is going to do next week. We are up more than 100% on this call so we need to exit and not be greedy.


We were stopped out on the long in SHLD shares on July 14th. The long call was optional and we are tracking it here with no stop loss.

Original Trade Description: July 11th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

Position 7/12/16 with a trade at $14.65

Long Sept $16 call @ .88, no stop loss.

Previously closed 7/14/16: Long SHLD shares @ $14.65, exit $13.75, -.90 loss.

SKX - Skechers - Company Profile


Coverage was initiated by Susquehanna at neutral. The various retail earnings last week lifted SKX off its lows. The remaining put option is not looking good but we do have more than a month to watch it. At the current price of 10 cents we do not have much to lose.

Original Trade Description: August 1st.

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

Position 8/2/16:

Long Sept $22 put @ .55, see portfolio graphic for stop loss.

Previously closed 8/11/16: Short SKX shares @ $23.75, exit $24.25, -.50 loss.

VNET - 21Vianet Group - Company Profile


VNET shares rebounded strongly on Tuesday on zero news. They had been flat lining at $9.50 for a month. They also announced earnings would be on Tuesday. There is still hope for this put if they miss on earnings. Otherwise, it will expire on Friday. If we get a big drop at the open on Wednesday I would close the position.

Original Trade Description: July 2nd.

21Vianet Group, Inc. provides carrier-neutral Internet data center services to Internet companies, government entities, blue-chip enterprises, and small-to mid-sized enterprises in the Peoples Republic of China. It offers hosting and related services to house servers and networking equipment in its data centers, and connects them through a data transmission network; and other hosting related value-added services.

In June 2015 the Chairman of the board, Kingsoft Corporation and Tsinghua Unigroup International proposed a deal to take the company private. Shares were trading around $20 at the time. On Thursday the same group rescinded their "non-binding" go private offer. The group said "after careful consideration, the group had determined not to proceed with the proposal under the current circumstances." Those circumstances were not described.

After keeping the stock price around $20 for the last year based on this offer the group decided to pass on the deal. While it may have had something to do with the earnings, I suspect it had more to do with the current problems with taking companies private in China. Qihoo (QIHU) and YY (YY) are also struggling. The China Securities Regulatory Commission is considering limits on the numbers of reverse mergers from previously foreign listed companies. There are worries they could impose an outright ban.

In an attempt to counter the drop in the stock the company announced a $200 million share repurchase plan. However, in the first sentence reads, "The Board has authorized, but not obligated, to repurchase up to $200 million in outstanding shares within the next we months." The key words there are "not obligated" which means they do not have to buy the shares if they change their minds. This is a Chinese company and the generally accepted rules are rarely followed. This is just another ploy to try and support the stock price.

Earnings August 24th.

Position 7/5/16:

Long August $9 put @ 85 cents. No initial stop loss.

Previously Closed 7/11/16: Short VNET shares @ $9.57, exit 9.88, -.31 cent loss.

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