Option Investor

Daily Newsletter, Thursday, 10/27/2016

Table of Contents

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

Market Wrap

Decent Earnings, Weak Market

by Thomas Hughes

Click here to email Thomas Hughes


Despite a raft of positive earnings reports the indices continue to tread water. Early morning action included a number of earnings beats along with positive economic data that helped to support the market but support it is about all that it did. Today's action was yet another day of listless, directionless, sideways consolidation within the recent ranges and it doesn't look like tomorrow will be any different. There was a fair amount of after hours action though, earnings from Google and others, so I do expect to see some big moves in individual stocks if not in the indices themselves.

International markets were a bit mixed as well. Asian indices fell for the most part, about -0.50% on average, as weakness in oil prices pressured the market lower. European indices were just as choppy by closed mixed with indices hovering around the break-even line.

Market Statistics

Early morning action saw futures rise, indicating a slightly positive open for the US market. These levels held throughout the morning as earnings and economic data was released. The indices opened with small gains across the board but, also across the board, began to fall within the first 5 minutes of trading. By 10:15 most had fallen below break even, led by the SPX -0.25% decline, and proceeded to move sideways from there. A small rally was able to form, just before noon, and drove the indices back to just above break-even but not much higher. These levels held for about a half hour until they fell back to just below break even. Sidewinding continued for most of the afternoon until about 3:15 when the indices (most of them) fell back to the low of the day.

Economic Calendar

The Economy

Economic data leads off with initial jobless claims which fell -3,000, better than expected, to hit 258,000. The previous week's figure was revised up by 1,000, the four week moving average came in at 253,000, a gain of 1,000 from last week's revised number. This makes the 86th week of claims below 300,000, the longest streak since 1970. On a not adjusted basis claims rose by 1% versus an expected rise of 2.2% and are down -3.7% year over year. In terms of labor trends, this data remains consistent with ongoing labor market health.

Continuing claims fell by -15,000 to hit 2.039 million, the lowest level for this metric since June of 2000. The four week moving average of continuing claims also fell, by -6,250, to hit 2.051 million, the lowest level for this metric since July of 2000. Continuing claims is a long term down trend and making new lows, consistent with ongoing labor market health and improvements.

The total number of Americans claiming unemployment benefits fell by -3,202 to hit 1.744 million, a new long term low. The decline is as expected, consistent with long term labor market improvements and seasonal trends. The rate of decline has slowed noticeably this week, there may be only another week if that until this metric bottoms out. The next seasonal move here will likely be an uptick in claims that lasts into the first part of next year, the key to watch for will be the peak which should top out in the 2.667 million range.

Durable Goods orders data was released at 8:30AM as well. The headline decline of -0.1%, the first decline in 3 months, offset by more positive internal data. Ex-transportation orders climbed +0.2%, ex-defense up +0.7%. Shipments gained 0.8%, driven by transportation, the 5 month of increase in the last 6. Unfilled orders fell however, clearing some of the back log, led again by transportation and the 5th month of decline. Inventories are up 0.1% on increases in machinery. Capital goods orders are up also, 1.5%, with a 2.2% increase in shipments. August data was revised higher.

Pending Home Sales data was released at 10AM and came in more than double the expectation, up 1.5%. The index came in at 110 and is up 2.4% year over year, the 22nd out of 25 months of year over year increases. Sales were strongest in the west, followed by the south, driven by strong demand. Lawrence Yun, NAR economist, says low inventory persists and may continue to drag on sales and lift prices.

The Dollar Index

The Dollar Index firmed on today's data, rising near 0.3% to close at a new 9 month high. Today's action is a move up from the $98.65 support level, tested over the past few days, and signals a likely continuation of the near term up trend. The indicators have weakened somewhat, consistent with a possible top or consolidation, but have not yet signaled reversal. Positive GDP data tomorrow, strong data next week, and FOMC outlook could easily spark another wave of upside momentum. Next upside target is near the $100.50 level, a full retracement of the first-half-2016 bear market. If support fails, at the $98.65 level, the index may find support at $98.

The Oil Index

Oil prices were choppy in the early part of the day, up to and until a new rumor hit the market. The latest news, cited as coming only from a "source", alleges that OPEC told Russia it is willing to cut its production levels as much as 4% from the cap imposed last month. If true it could help alleviate over supply conditions but more than likely not as 4% only brings the target OPEC output to 31.25 million barrels a month, the level at which OPEC first proposed to freeze production. WTI gained a little more than 1.5% to trade up to and test resistance at the $50 level. In the near term rumors, hopes and news may help support prices, longer term the supply/demand situation remains skewed toward supply.

The Oil Index rose about 0.75% in today's action but remains constrained by resistance. The index is trading at/near the top of a 7 month trading range and does not look like it wants to break out. This may change by tomorrow however as reports from Exxon, Phillips 66 and Chevron are on tap. If today's report from ConnocoPhillips is any indication the reports should be good. The caveat is that Connoco reported an increase in production that doesn't bode well for forward oil prices.

The Gold Index

Gold prices held steady in today's session despite a rising dollar. Physical demand driven by festival demand in India is helping to support prices. Spot gold held near the flat line in a choppy session, just above $1,265, and may remain trapped in a narrow range for the next 4 trading days, until next Wednesday and the FOMC meeting.

The gold miners came under pressure again today as low gold prices hurts forward outlook. Some of the miners have reported, decently, but with spot prices off their most recent highs by 5% next quarter and next year earnings growth is questionable. The miners ETF GDX fell nearly -2% in today's session, moving down from the short term moving average, and set a new 2 week low beneath the 38.2% retracement level and support target. The indicators are retreating from a peak, consistent with a test of resistance within the near term down trend, and may lead the ETF down to retest support near $22.50. A break below this level would be bearish and could take the index down to $20 or lower.

In The News, Story Stocks and Earnings

Today was the busiest day of the Q3 earnings cycle with dozens of reports before and after the bell. Early morning news was dominated by reports by ConnocoPhillips, Tesla and Twitter among others. ConnocoPhillips reported an adjusted net loss of -$0.66, slightly better than expected and better than last year. Results were driven by cost efficiencies, a reduction in capex and the rebound in oil prices. Full year guidance is positive, production outlook was raised while capex was lowered, which helped lift the stock nearly 6.5%. In terms of forward earnings outlook the energy sector is expected to lead the market next year with YOY growth in excess of 300%.

Tesla reported earnings after the bell yesterday and was the subject of much discussion today. The company reported what looked to be a decent report, they posted a profit, but details within have left many analysts less than bullish. There is concern over the Model 3 launch slated for next year as well as the efficacy of the Solar City merger. Another concern is that this quarters results are due more to balance sheet manipulation than true strength in sales. Shares gapped up in the overnight session, opening this morning with a gain of 5%, only to sell off during the session on 5X average daily volume.

Twitter reported before the bell and beat by a penny. The bad news is that the company still posted a loss. CEO Jack Dorsey says the product is "revolutionary" but I and most of the market says, so what? They still haven't found a way to really monetize their traffic and the user base is just too small. Shares of the stock did more higher on the news, about 3%, but sold off during the day leaving them flat for the day and the week. At best I think Twitter a takeover target but based on recent activity it looks like nobody really wants to buy it.

After hours earnings action was quite busy and delivered a mixed bag of results.

Amazon missed earnings expectations by a large margin on revenue slightly above forecast. The company announced that sales were up 29% along with more than 3 dozen new product features launched during the quarter. Forward guidance is calling for a 17% to 27% increase in the next quarter, slightly below expectations. Shares of the stock fell -5% on the news.

ABC, parent of Google, beat on the top and bottom lines, barely, and announced a $7 billion stock buy back plan.

Expedia missed on the bottom line but beat revenue expectations, both down from the same period last year. The bad news is that bookings were light although next quarter outlook is promising. Shares of the stock were a bit volatile following the news but eventually move up by more than 6%.

LinkedIn beat EPS and revenue estimates smartly. The street was calling for EPS near $0.80, actual is $1.18. The strength is driven by a 23% increase in total revenue, an 18% increase in members and a 26% increase in marketing revenue. Shares of the stock moved up marginally in the after hours.

The Indices

Today's action was nothing more than a continuation of recent trading ranges. For the most part price action was to the down side, led by the NASDAQ Composite, but not all indices posted a loss. The Dow Jones Transportation Average closed with a gain near 0.6%, closing above the short term moving average. Despite this gain the index remains firmly trapped within its 8 month trading range and does not look like it is ready to break out. The indices continue to weaken indicating a possible move lower to test for support. If the index does move lower the bottom of the range is near 7,750 although support may be reached before then. The top of the range is near 8,150.

The tech heavy NASDAQ Composite fell about -0.65%, dropping from the short term moving average and closing just below my near term support target at the previous all time high. Today's candle is a medium size black candle confirming downward bias within the near term trading range. The indicators are mixed but remain consistent with range bound trading so it doesn't look like any kind of strong move is gearing up. If the index continues lower it may find support at 5,150 or 5,100, if not a move down 5,000 is possible.

The S&P 500 closed with a loss of -0.30%, creating a smallish black bodied candled. Today's action was light but moved down from the short term moving average and looks like it will continue downward to test support at the bottom of the trading range. The indicators are mixed as to direction but firmly consistent with range bound trading so a move below the bottom of the range does not look likely at this time. Support target is 2,120 and will likely hold into the near term.

The blue chip Dow Jones Industrial Average closed with a loss near -0.16%, creating a small black bodied candle within a very narrow trading range. Today's action moved down from the short term moving average but does not look like it will move much lower. The range has been holding for many weeks and will likely continue to hold at least until the FOMC meeting and more likely until the election in 2 weeks. The indicators remain consistent with range bound trading and support this view. A break outside of the range, when it comes, may be strong and likely lead to a pronounced market movement into the end of the year.

The market remains range bound. We are approaching the end of the 8th week of range bound trading, a period which began at the start of the fall trading season and likely to end with the election, if not with the FOMC meeting. Where the market goes from here is hard to say but based on economic trends, current quarter earnings, next quarter and next year earnings outlook if there is a pull back, dip to support, correction or other bear market activity it will most probably be another buy-on-the-dip opportunity within a larger, secular, bull market. I remain cautious in the near term, FOMC and election risk force me to, but I see the makings of a great rally in the works so am bullish for the longer term.

Until then, remember the trend!

Thomas Hughes

New Plays

Standing Aside

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell 2000 is warning investors to move to the sidelines. In the play update section, I outlined the collapse in the Russell 2000 well below critical support, which is a screaming sell signal. However, the S&P futures are strongly positive in the overnight session. I believe we are going to see a potential window dressing short squeeze at the open or else the futures are going to reverse overnight and follow the Russell 2000 lower. Regardless of what happens, the odds for a volatile and unpredictable Friday are very high. I am passing on adding any new positions today. There is no reason to jump into an irrational and potentially volatile market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Implosion

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 crashed through support at 1,200 to produce a screaming sell signal. The Nasdaq has now given back all its gains from the rally to new highs and the Dow is stuck in a very narrow trading range. The market appears to be getting weaker BUT the S&P futures have been up about 5 points in the afterhours session. The market is severely conflicted and there is a very good chance we will see some high volatility on Friday.

The S&P futures are hovering right on the 100-day EMA and a break of that support could get ugly very quickly. This is not a market where we want to be adding new positions.

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

SHLD - Sears Holdings
The short stock position was entered at the open.

FNSR - Finisar
The long stock recommendation has been cancelled.

CSIQ - Canadian Solar
The long stock position remains unopened until a trade at $16.15.

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

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

CC - Chemours - Company Profile


No specific news. Dow (DOW) reported earnings of 91 cents compared to estimates for 80 cents. This lifted the entire chemical sector and allowed CC to only decline 5 cents for the day.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.

CSIQ - Canadian Solar - Company Profile


No specific news. High today $15.50. CSIQ won the "Best PV Module Manufacturer" award in Brazil.

This position remains unopened until a trade at $16.15.

Original Trade Description: October 20th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as they continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Share have resistance at $16 and then clear sailing until $20.

With a CSIQ trade at $16.15

Buy CSIQ shares, currently $15.70, initial stop loss $14.35

Optional: Buy Nov $17 call, currently .65, no stop loss.

FNSR - Finisar - Company Profile


Two large customers of Acacia Communications (ACIA) gave weak guidance and the entire optical networking sector crashed. I am cancelling this recommendation.

Original Trade Description: October 19th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

We entered a FNSR position on October 4th just as shares gapped open to $31. That turned out to be the peak for a three month rally. After a week of declines the shares could be ready to move higher.

The declines were sector related. The optical networking stocks were all slammed after some guidance warnings in the space. Finisar was riding the crest of a Goldman Sachs upgrade to buy on the 11th. That caused the peak in the stock just as the sector news appeared.

I am putting an entry trigger on this position to make sure the stock can get over recent resistance before we buy it.

Recommendation cancelled

HLX - Helix Energy Solutions - Company Profile


No specific news and shares actually gained slightly.

Original Trade Description: October 24th.

Helix Energy Solutions Group, Inc., provides specialty services to the offshore energy industry primarily in the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. It operates through three segments: Well Intervention, Robotics, and Production Facilities. The company engineers, manages, and conducts well construction, intervention, and abandonment operations in water depths ranging from 200 to 10,000 feet; and operates remotely operated vehicles (ROVs), trenchers, and ROVDrills for offshore construction, maintenance, and well intervention services. It also offers well intervention; intervention engineering; production enhancement; inspection, repair, and maintenance of production structures, trees, jumpers, risers, pipelines, and subsea equipment; and life of field support. In addition, the company provides reclamation and remediation services; well plugging and abandonment services; pipeline abandonment services; and site inspections. Further, it engages in the installation of subsea pipelines, flowlines, control umbilicals, manifold assemblies, and risers; burial of pipelines; installation and tie-in of riser and manifold assembly; commissioning, testing, and inspection activities; and provision of cable and umbilical lay, and connection services. Additionally, the company offers oil and natural gas processing services to oil and natural gas companies; and fast response system services. It serves independent oil and gas producers and suppliers, pipeline transmission companies, alternative energy companies, and offshore engineering and construction firms. Company description from FinViz.com.

Last week Helix reported earnings of 10 cents compared to estimates for 4 cents. Revenue of $161.2 million beat estimates for $156.4 million. The company said they had "seen a significant improvement in their financial results but industry conditions remain challenging."

An increase in the price of oil would do wonders for Helix and all the other offshore service businesses. Fortunately, for Helix they operate around the world and there is a strong surge in offshore natural gas drilling and pipeline construction around Africa and Australia. They are also very active in the North Sea. The natural gas activity has kept them afloat where other offshore service companies have failed.

They sold $100 million in stock in Aug/Sep and they had $499 million in cash at the end of the quarter. They prepaid $8 million in debt in Q3 and capex spending was $99 million.

The company is in good shape financially and the offshore drilling activity is increasing. If OPEC is successful in claiming a production cut/halt at the end of November this will raise the price of oil and benefit everyone.

Earnings January 18th.

Position 10/25/16:

Long HLX shares @ $10.18, see portfolio graphic for stop loss.

No options recommended.

MENT - Mentor Graphics - Company Profile


No specific news. Investors took profits in a weak small cap market after Wednesday's new high.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.


Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.

BEARISH Play Updates

SHLD - Sears Holdings - Company Profile


Sears announced their Heroes at Home for the Holidays project where volunteers will build wheelchair access ramps for disabled vets. They also announced donations to the cause based on sales of certain products. Shares rebounded slightly at the close.

Original Trade Description: October 26th.

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 in mid September 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 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.

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.

In late September, Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notice of termination for 17 stores totaling 1.7 million square feet at the end of January.

Last week Detwiler Fenton warned that Sears was apparently working on monetizing its real estate. DF said the number of Kmart closures was going to accelerate in order for Sears to raise cash and offset the burn rate. DF said Sears had sent directives to a large number of stores telling them to clear backroom inventories. They also began cutting prices on appliances by 50% and using heavy promotions to reduce inventory. They also noted that Sears was moving appliance inventories from Kmart stores into certain locations suggesting a new round of store closures was coming.

Also making headlines last week was Jakks Pacific halting shipments of much needed toys to Kmart for fear of not being paid. Multiple reports suggested a potential post holiday bankruptcy filing. BMO Capital Markets said it had been asked repeatedly by other suppliers if they should continue shipping merchandise to Sears and Kmart. This news could not come at a worse time for Kmart ahead of the holiday shopping season. Once the news spreads of one supplier halting shipments, it is sure to spread to other suppliers as well. This could be Kmart's last Christmas.

Earnings December 1st.

Shares bounced on a suggestion they might be preparing a real estate sale but are returning to the lows. A trade under $10.50 would be a 13-year low.

Position 10/27/16:

Short SHLD shares @ $10.92, see portfolio graphic for stop loss.

SSYS - Stratasys Ltd - Company Profile


GE confirmed the offer for SLM Solutions had expired. In its place they said they had reached an agreement to buy privately held Concept Laser instead. That means they are probably not going to make a run at SSYS, DDD or VJET. Shares fell 47 cents on SSYS today to close on support.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.

VXX - Volatility Index Futures - ETF Description


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.

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