Option Investor

Daily Newsletter, Monday, 9/26/2016

Table of Contents

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

Market Wrap

Presidential Debate 2016

by Thomas Hughes

Click here to email Thomas Hughes


Amid economic earnings uncertainity the first, and maybe only, presidential debate between Donald Trump and Hillary Clinton dominated today's market. Many analysts are saying that the results could clinch the election and the odds seem to be in Trumps favor, providing he can hold himself together and not go "off-script". The broad market sold off, perhaps in a defensive gesture, but not hard and remains well within recent ranges. Volatility is also still will us, the VIX retreat to test support last week and has begun this week with a move higher.

International markets seemed to be just as interested in the debate as we. Indices around the globe pulled back by at least a full percent. Also on the radar is the Algiers OPEC meeting, happening as we speak, at which production caps and other supply limiting actions are expected to be discussed. Asian indices fell by roughly -1.5%, those in Europe in a little more. European indices were furthered impacted by news the EU would not be aiding Deutsche Bank in its negotiations with the DOJ.

Market Statistics

Futures indicated a negative opening all morning, the SPX set for a loss near -0.5%. These levels held all morning although there was choppiness to trading. The SPX opened with a loss near -8 points and quickly moved down to a morning low slightly more than -15 points. After an hour or so of sidewinding above the early low another intraday low was set just before noon, about -17 points for the SPX. Sidewinding resumed from that point and persisted for the next several hours. Afternoon trading was much the same, sideways drift with downward bias that resulted in several new intraday lows. By end of day the indices had lost nearly a full percent and closed near the lows of the day.

Economic Calendar

The Economy

No economic data was released before the opening bell. After the bell, at 10AM, we received the latest read on New Home Sales. New Homes Sales fell -7.6% from the previous month, a little less than expected, but remain up by more than 20% year over year. This month's data shows a slow down in growth of sales in the near term but ongoing strength in sales longer term. The current inventory of new homes remains low at only 4.5 months and a major factor hindering sales growth.

Moody's Survey Of Business Confidence fell -0.5% to 25.1. This is the lowest level in 4 weeks but relatively stable over the past 4 months. Looking at the charts it has taken a long time, almost a year exactly, but sentiment appears to have bottomed since falling from its peak. According to Mr. Zandi sentiment is stable and consistent with global economic growth. Caution remains in the near term, the longer term outlook remains positive. Of course, outlook was positive 6 months ago too and nothing has really changed since then.

Earnings season is slowly progressing. According to FactSet 9 S&P 500 companies have reported so far, 8 more are expected to report this week. Of those that have reported 6 have beaten earnings estimates and 4 have beaten revenue estimates, both below average. The blended rate for the 3rd quarter has fallen again, dipping to -2.3% and the lowest level for the series. At this level the index is still in position for the final earnings growth rate to turn positive, based on the averages, but could fall to levels, sub -4%, where that may not be possible. Of the 10, now 11, sectors of the S&P 500 all of them have been revised lower since the start of the quarter with 79 (15.8%) offering negative guidance.

Looking out to the end of the year and next year outlook remains positive but took another hit this week. Full year 2016 fell a tenth to -0.3% while full year 2017 fell three tenths to the lowest level since mid February, 13.1%. Fourth quarter 2016 also fell a tenth, to 5.7%. Based on these figures we are coming out of the earnings recession, even if 3rd quarter earnings come in net negative, so it looks like conditions are setting up for earnings driven rally.

The only economic release on the calendar for tomorrow is the Case Shiller 20 City Index, a non-mover for sure. Wednesday's data is a little better, Durable Goods. Thursday is weekly jobless claims, the 3rd estimate for 2nd quarter GDP and Pending Homes Sales. Friday caps the week with Personal Income and Spending, PCE Prices (an important Fed watched metric) and Chicago PMI. Next week is my favorite week of the month, economically, chock full of labor data (ADP, NFP) and more.

The Dollar Index

The Dollar Index fell today, shedding about -0.25%, but remains range bound and without direction. The index is trading just below the mid-point of the 3 month range with no indication of breaking out. The indicators are pointing lower at this time the index may drift that direction but without a change in fundamentals or at least some really game changing data it is most likely going to remain range bound. Next week could move the needle some, labor data is an important Fed metric, after that ECB, BOJ and FOMC meetings are the next potential catalysts. Kuroda at the BOJ said today they were ready to do what it takes to spur inflation but the market is not impressed with their currency weakening ability and the yen gained strength.

The Oil Index

Oil prices surged higher on hopes that OPEC would do something to support prices. The problem is that even if OPEC were to suspend production increases, production levels are already to high. Expect to see plenty of headline tomorrow and perhaps a little volatility. Today prices gained more than 3.5% to trade above $46. The move higher may continue if rumor and headline support it but resistance remains near $48.50 and $50. Looking back over oil prices over the past 2 months it appears they are winding up around the $45-$46 level into a narrowing range that may center on this OPEC meeting.

The energy sector was not moved by oil prices, perhaps seeing the move as one without legs to stand on. In any event, the Oil Index closed the day with nearly no movement to speak of after creating a small doji candle. The index is still trading below resistance at the middle of its range with indicators showing increasing weakness. Momentum is almost absent but stochastic continues to drift lower and has fallen below the lower signal line and suggest a weakness in the market and possible move down to test the lower boundary of the range, near 1,080. Resistance is the mid-point of the range, near 1,120, and the short term moving average.

The Gold Index

Gold prices held firm on a weakening dollar but is likewise range bound. Spot prices gained about a quarter percent intraday to trade near $1,344. Prices are likely to remain range bound while Fed uncertainty persists, and in the vacuum of other fundamental movers. Resistance is near the mid-point of the 3 month range. Near term it looks like prices are moving higher so a test of resistance is likely. A break above $1,350 would be bullish and could take prices up to test the top of the range near $1,385.

The gold miners held steady today as well. The Gold Miners ETF GDX fell but only about -0.04%. The ETF is sitting on top of the $26.70 level, a support level confirmed by last Wednesday's long white candle and the indicators. The ETF is also capped by resistance at the short term moving average. Of the two support looks stronger, it is located at a Fibonacci Retracement level of long term significance, so a break above the moving average could be imminent. If so the ETF could return to test resistance at the current long term high, near $32.

In The News, Story Stocks and Earnings

Shares of Twitter jumped for the second day in a row as new bidders enter the arena. Today's arrival, according to some sketchy reports, is Disney. Why Disney would want Twitter is beyond many analysts comprehension some see a benefit. Meanwhile, Twitter is getting downgraded based on low user growth and revenue outlook. Shares of the stock opened with a loss but moved sharply higher during the day to close with a gain near 0.75%.

Cal-Maine, one of the largest shippers of eggs in the country, reported earnings this morning before the bell. Results are not good and reflect a drastic correction in the prices of eggs following the recovery of chicken flocks post avian-flu outbreak. According to the report the company's average selling price for the quarter is down nearly 60% from its peak set a year ago. Quarterly revenue fell 60.7% resulting in a net loss of -$0.67 per share. Last year at this time the company was reporting a profit of $2.95. Shares of CALM fell more than -3% to trade just above support at the long term low.

Carnival cruise line reported earnings this morning described in the statement as best quarterly earnings in the company's history. Earnings beat expectations, revenue did not, and guidance was reaffirmed in-line with consensus. Sales were strong in the US and Europe with a good showing in all major sailing regions. Looking forward, the company has commissioned three new ships that should be on the seas in the next couple of years. Shares of the stock opened with a gain but fell hard during the day to close with a loss greater than -1.25%.

The Indices

Today's action was light considering the downward tilt to prices. The indices really only drift lower, slow sidewinding throughout the day and not really moving lower with confidence. The day's leader is a tie between the NASDAQ Composite and Dow Jones Industrial Average which both lost -0.91%. The tech heavy index created only a small black bodied candle but a bearish candle it is, moving lower extending the pull back from freshly set all time highs. The index is approaching potential support at the short term moving average, near 5,240, and may break through. The indicators are a bit mixed, bullish in the nearer term yet divergent and showing weakness in the longer, so support and its strength are questionable. A break below 5,240 could take the index down to 5,050 or lower.

The blue chips created a medium bodied black candle, moving down from recently broken support at the short term moving average. The index appears to be moving lower with near term target at 18,000. Despite the downward bias the index remains range bound over the short to long term. The indicators are a bit mixed on this chart too, consistent with range bound trading. A break below support would be bearish and could take this index down to 17,750 and a long term up trend line, well within the long term trading range.

The S&P 500 came in runner up today with a loss of -0.86%. The broad market created a medium bodied black candle moving down from the short term moving average and appears to be heading for support at 2,120. The indicators are mixed, consistent with range bound trading, so a break below support does not look likely.

Today's laggard is the Dow Jones Transportation Average with a loss of only -0.28%. The transports created a small doji candle sitting on the short term moving average, in the middle of the 3 month trading range. The index is firmly range bound, confirmed by the indicators, and appears to be going nowhere but sidways. Bottom of the range is 7,750, top of the range near 8,200. A break below the lower range limit would be bearish in the near to short term and could result in a pull back to 7,500 or lower.

The indices remain range bound, range bound and waiting for something to happen. That something may be tonight's debate, or the results of the debate but I don't think so. Politics are important and they will help direct market direction long term but nearer term we're still waiting on a questionable season of earnings, we're still waiting on the FOMC to greenlight the economy and we're still waiting on the actual election... all of which happen to coincide the first two weeks of November. Withg so much uncertainty I remain cautious in the near term, waiting for my long term signal for bullish entries.

Until then, remember the trend!

Thomas Hughes

New Plays

Multiple Business Problems

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies have enjoyed a strong business for years until the winds of change begin to blow. Pilgrim's Pride is one of those companies as consumers are starting to demand different types of commodity foods.


No New Bullish Plays


PPC - Pilgrims Pride - Company Profile

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

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Sell short PPC shares, currently $20.90, initial stop loss $21.65.

Optional: Buy Nov $20 put, currently 75 cents, initial stop loss $21.65.

In Play Updates and Reviews

Lehman Moment

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market declined sharply on fears the European banks were heading for a Lehman like event. Deutsche Bank (DB) fell -7% and most of the other European banks fell 3-5% on worries about Brexit, nonperforming loans and insufficient capital. The U.S. market gapped lower at the open and closed at the lows for the day on the bank worry and uncertainty about the Monday night debate.

The Premier portfolio did rather well and we only lost one position. BOX and EXEL were both up for the day.

The small cap indexes fell sharply and the S&P-600 is moving back towards the middle of the congestion range from the last two months. The Dow collapsed back to a low below last week's lows.

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

WFM - Whole Foods Market
The short stock position remains unopened until a trade at 27.75.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile


No specific news. Company exhibiting new products at the SCTE/ISBE Cable-Tec Expo this week.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25

BOX - Box Inc - Company Profile


No specific news. Shares rose in a bad market after Rosenblatt initiated coverage with a buy rating.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.

EXEL - Exelixis - Company Profile


Nice gain today on estimate upgrades from Zacks.com

In the past 30 days, 3 quarterly estimates have gone higher for Exelixis while none have gone lower in the same time period. The trend has been pretty favorable too, with estimates narrowing from a loss of 16 cents a share 30 days ago, to a loss of 13 cents per share today, a move of 23.1%.

Meanwhile, Exelixis’s current year figures are also looking quite promising, with 4 estimates moving higher in the past month, compared to none lower. The consensus estimate trend has also seen a boost for this time frame, narrowing from a loss of 71 cents a share 30 days ago to a loss of 63 cents per share today, an increase of 12.7%.

Original Trade Description: September 24th.

Exelixis, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of new medicines with the potential to enhance care and outcomes for people with cancer. It focuses on advancing cabozantinib, an inhibitor of multiple tyrosine kinases, including MET, AXL, and VEGF receptors, which has shown clinical anti-tumor activity in approximately 20 forms of cancer and is the subject of a broad clinical development program. The company has received regulatory approval for two separate formulations of cabozantinib for the treatment of certain forms of kidney and thyroid cancer and marketed as CABOMETYX tablets in the United States and COMETRIQ capsules in the United States and European Union respectively. It also offers COTELLIC (cobimetinib), a selective inhibitor of MEK, in the United States and European Union; and is being evaluated for further potential indications by Roche and Genentech under collaboration with Exelixis. Exelixis, Inc. has collaboration and license agreements with Ipsen Pharma SAS, Genentech, Inc., GlaxoSmithKline, Bristol-Myers Squibb Company, Sanofi, Merck, and Daiichi Sankyo Company Limited for the development and commercialization of various compounds and programs. Company description from FinViz.com

Potential cancer drugs are the main focus of the big cap drug companies. They believe a breakthrough in cancer treatment is just around the corner and the drug that turns into a silver bullet is going to be obscenely valuable. With over 200 types of identified cancers no one drug has been able to affect them all.

Exelixis has multiple drugs in process and cabozantinib has proven effective in 20 different forms of cancer. The company appears well on its way to finding that silver bullet.

The stock is on fire as more investors decide the company will be acquired. If the price is anything like the Alergan (AGN) purchase of Tobira Therapeutics (TBRA) last week any takeout price could be astronomical. TBRA closed at $4.73 and spiked to $40 the next morning.

Earnings Nov 2nd.

I know the stock has been a rocket lately but analysts still believe it is undervalued. With the speculation in the biotech sector the rocket could continue higher. If we can just get a couple days of gains we can tighten up the stop loss and let it ride. Hopefully it will be on somebody's shopping list.

I have wanted to add it for the last couple weeks and kept thinking it would take a rest. It is not happening. Every day I look at it again and it posted another gain.

Position 9/26/15 with an EXEL trade at $15.10

Long EXEL shares @ $15.10, see portfolio graphic for stop loss.

No options recommended due to cost.

KS - KapStone Paper & Packaging - Company Profile


No specific news. Deutsche Bank raised Kapstone from hold to buy on improving economics for containerboard.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.

PTLA - Portola Pharmaceuticals - Company Profile


No specific news. Resistance at $24 held and we were stopped out on the market drop today.

Original Trade Description: September 12th.

Portola Pharmaceuticals, Inc., a biopharmaceutical company, develops and commercializes therapeutics for patients in the areas of thrombosis, other hematologic disorders, and inflammation. The company is developing Betrixaban, an oral, once-daily Factor Xa inhibitor, which is in Phase III clinical trial for treating venous thromboembolism prophylaxis in acute medically ill patients in-hospital and post discharge; and Andexanet alfa, a recombinant protein that is designed to reverse the anticoagulant activity in patients treated with a Factor Xa inhibitor. The company is also developing Cerdulatinib, which is in Phase I/IIa proof-of-concept study, an orally available kinase inhibitor that inhibits spleen tyrosine kinase (Syk) and janus kinases enzymes, which regulate signaling pathways, as well as for hematologic, or blood, cancers, and inflammatory disorders. In addition, it is involved in the development of PRT2607, a selective Syk inhibitor. Portola has collaboration agreements with nearly a dozen major pharma companies including Bristoll Myers, Pfizer and Bayer to name a few. Company description from FinViz.com.

The billion dollar drug is Andexxa (Andexanet Alpha). In February, Portola licensed the rights in Japan to Bristol-Myers and Pfizer for $15 million in upfront payments, $90 million in milestone payments and double-digit royalties. This is just for Japan. Portola is planning on submitting the MAA for approval in Q3.

In the U.S., Portola suffered a setback in August when the FDA rejected its BLA submission for Andexxa. The FDA asked for some manufacturing information and a change to the labeling. Portola plans to meet with the FDA in the coming weeks to resolve any outstanding questions. Once the drug is approved we could see the shares spike significantly. There is almost zero risk of non-approval based on the remaining questions posed by the FDA. Shares fell from $28 to $18 on the news in late August and the rebound is starting to accelerate.

Shares only lost $1 in the Friday crash and recovered 50% of that on Monday. Support is $21 and shares closed at $22.

Earnings Nov 9th.

Because the futures are down so sharply tonight I am going to put an entry trigger on the position. I hate to say buy something and then have the market gap down -100 points at the open on its way to a repeat of Friday.

Position 9/14/16 with a PTLA trade at $22.25

Closed 9/26/16: Long PTLA shares @ $22.25, exit $22.85, +.60 gain.

BEARISH Play Updates

SHLD - Sears Holdings - Company Profile


No specific news. New 4-month low.

Original Trade Description: September 19th.

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 the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


The VXX gapped up $2 with the indexes gapping down significantly and closing on their lows. This is far less than the prior spike and any positive market will see the VXX return to its lows.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

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. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

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

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

WFM - Whole Foods Market - Company Profile


No specific news. No material movement. I am cancelling this recommendation. If it did not go down in two days of weak markets then it is time to give up on a decline.

Original Trade Description: September 14th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. As of January 28, 2016, the company had approximately 434 stores in the United States, Canada, and the United Kingdom. Company description from FinViz.com.

Whole Foods Market has been known to consumers as the Whole Paycheck Market because of their high prices. That has changed somewhat in recent months because the competition is rapidly accelerating. Sprouts Farmers Market, Walmart and all the various Kroger branded chains are slashing prices on organic products and adding them to their shelves by the hundreds.

Last week Sprouts (SFM) warned that Q3 same store sales would be flat compared to prior guidance of +3.5% to +4.5% that they gave just two months ago. That is a significant decline in expectations. They cited increased price competition and a highly promotional environment that was cutting into profits as well. Their own chart for same store sales tells the tale.

I am choosing to play WFM instead of SFM because the latter dropped significantly on the guidance warning while did drop and is continuing to drop. Since Whole Foods is the most expensive store in the group they have the most market share to lose.

Earnings are Oct 26th and investors should be afraid to hold into that event.

Recommendation cancelled.

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