Option Investor

Daily Newsletter, Monday, 10/31/2016

Table of Contents

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

Market Wrap

Data, Earnings, FOMC and Emails

by Thomas Hughes

Click here to email Thomas Hughes


As if the we did not have enough to worry about with the weeks schedule of earnings, economic data and the FOMC meeting, Hillary's emails have reemerged to disrupt the market. The latest; as many as 650,000 new emails have been discovered, possibly the 33,000 deleted emails, and the FBI has gotten the warrant to investigate them. They belong to Hillary's advisor, Huma Abedin, and were found hidden on her husband's computer. What they contain is yet to be revealed but the rumors are flying.

In other news more closely related to the market; this will be the biggest week of the earnings season, we've a raft of major macro-economic data on tap and the FOMC meeting/policy statement on Wednesday. Today's action was understandably muted in light of all that is going on; data, earnings and the FOMC all have the power to change the underlying fundamental outlook of the market while we wait for the another email-bomb to drop.

International market were just as stunned as we at the revelation the FBI had discovered new emails. Asian and European indices both lost ground in choppy trading but losses were minimal.

Market Statistics

Futures trading indicated a flat to positive open all morning and this was strengthened somewhat following the release of Personal Income & Spending data. The open was quiet, not much action to speak of, the SPX opened with a gain of about 3 points and held that level for the first hour of trading. Around 11:30AM the index pulled back to test break-even for support and made a small bounce, up to about +6.5 points, before falling back to retest for support. The rest of the day saw the indices trade between early lows and mid day highs, closing near the lows of the day.

Economic Calendar

The Economy

Personal Income & Spending data was released at 8:30AM, the data is for September, and shows a continued and steady increase in both income, spending and consumer level inflation. Personal Income rose by 0.3% to the highest level in 3 months. This is slightly off the 0.4% predicted by analysts but is made up for by an upward revision to the previous month. Personal Spending rose by a more robust 0.5%, slightly ahead of expectations, but is offset by a downward revision of -0.1% to the previous month. Disposable Personal Income rose by 0.3%, Real DPI rose by a more modest 0.1%. Headline PCE, a Fed favored indicator of inflation, rose by 0.5% while Real PCE rose by a more robust 1.2%. Ex-food PCE was up 0.1%, ex-food and energy up 1.7%.

Chicago PMI was released at 10AM. This gauge of manufacturing fell by -3.6 to 50.6, the lowest level in more than 6 months, indicating a slowdown in expansion. The 3 month average of CPMI is 52.1 which is consistent with a moderately growing manufacturing sector. The decline was led by drops in production and new orders but not limited to them. Employment and inventory levels fell as well.

Moody's Survey Of Business Confidence jumped 1.1 points to 30.4, the highest level since early May. The index has made a notable increase over the last few weeks but I suspect with the weekend's email news that could change next week. Mr. Zandi says that US business sentiment is consistent with an expanding economy, the rest of the world less so but still positive, and that sentiment in South America may be bottoming.

So far 58% of the S&P 500 has reported earnings and the scorecard looks just like it has the past few quarters. Of those that have reported so far 74% have beaten EPS estimates, above average, while only 58% have beaten revenue estimates, below average. The good news is that the blended rate of earnings growth has turned positive which means we have emerged from the earning recession; this week's blended rate is up nearly +2% to 1.6%, snapping a 5 quarter losing streak. So far all 11 sectors have delivered better than expected results, led by the real estate sector. Looking forward, the Forward Looking 12 month EPS outlook has finally broken out of its range and hit a new high.

Looking to the next quarter, the full year and next year earnings outlook remains positive but estimates continue to shift. Fourth quarter 2016 is now expected to see growth in the range of 4.6%, down -0.9% from last week, while full year estimates have risen to 0.2%, up 0.1%. If the trends hold up and next quarter is as much better than expected as the average tell us earnings growth for the quarter could be as high as 9% or 10%, full year growth in the 1% to 2% range. Next year, full year 2017 estimates fell by -0.4% but remain strong at 12%.

The Dollar Index

The Dollar Index firmed a bit in today's action and remains in near term uptrend. The index gained about 0.25% on steady growth in wages and spending but gains were capped by the 78.6% retracement level. This level has been the point of consolidation over the past two weeks and the likely starting point of the next move. The indicators are bearish and pointing lower at this time,suggesting near term support could be tested, but consistent with consolidation within an uptrend so I wouldn't read to much into them just yet. A move higher has a target near the $100.50 level and last years high, a move lower could go as low as $97.20 before hitting the next strong support level. If I had to put my finger on a day these moves might start it would have to be Wednesday afternoon with the release of the FOMC statement. The Fed Watch Tool shows a 6% chance of November rate hike and a 78% chance of December hike. We likely won't get a hike this week but we could get hawkish statements.

The Oil Index

Oil prices tanked today, falling more than -3%, as the OPEC and hope driven rally evaporates. There is growing concern that OPEC and non-OPEC members alike will not comply or cooperate with proposed production capping. This, along with rampant production, high supply levels and tepid demand add up to one thing, a continuation of the already years long supply glut. WTI fell just over $1.50 to hit a four week low. If they continue to fall first target for support is in the $45 to $46 range.

The Oil Index came under pressure today as oil prices fell and 2017 earnings outlook comes into question. Next year the oil sector is expected to see earnings growth in the range of 300%, but all based on $50+ oil. If oil prices remain low outlook will fall, the silver lining is that there will be growth, just not 300%. Today the Oil Index fell a little more than -0.90% to close below the short term moving average. The index remains range bound and now looks like it could move down to the bottom of the range. The indicators are consistent with range bound trading and showing a bearish crossover, consistent with lower prices. Target for support is the bottom of the range, near 1,120.

The Gold Index

Gold prices held steady in today's action, falling about $3 or -0.25%, to trade just above $1270. Spot prices have been edging higher over the past two weeks but remain near the recent low and below potential resistance areas near $1285 and $1,300. Prices may continue to tread water near this level for the next day or two, up to and until the FOMC meeting. At that time it will depend on them and what they do to the dollar. A move down may find support near $1,250, a move higher may find resistance near $1,300.

The gold miners remain in limbo while we await the Fed's next move but today's move was to the upside. The miners ETF GDX rose in today's session, counter to the underlying commodity but remains below resistance. Resistance is the short term moving average, near $22.25. The indicators are a bit mixed, bullish but in decline and generally consistent with the one month trading range. A move up above resistance could go as high as $27.23, a move down to next support could go as low as $22.50.

In The News, Story Stocks and Earnings

Even with all the earnings on tap for the week the number one story today was M&A related. GE and Baker Hughes announced the merger of their oil & gas operations in a deal that will make a company to compete with the likes of Schlumberger. Combined revenues are expected to be in the range of $32 to $33 billion annually. GE will put up all of its oil and gas resources along with a special $7.4 billion cash dividend for owners of BHI and end up owning 62.5% of the new company. GE opened the day higher but sold off to close near break even, BHI also opened the day higher and sold off but closed with a much greater loss, near 7.25%.

Cardinal Health reported earnings before the bell. The maker/provider of medical products and services reported earnings and revenue ahead of expectations. GAAP EPS of $0.96 is down 10% from last year, adjusted EPS of $1.24 beat by a nickel. Revenue grew 14% year over year but was not enough to overcome rising costs. The company went on to lower full year guidance to a range matching consensus. Shares of the stock gained a little more than 2% on the news but the move barely recovers losses experienced at the end of last week.

Williams Companies Incs reported before the bell. Williams Companies Inc is an integrated energy company delivering a range of services and products from the "wellhead to the burner tip" including but not limited to oil, natural gas and electricity. The company delivered relatively strong results but just not enough to move the market higher. The good news is that cash flow from operations increased by 2%, net income turned positive, adjusted ebidta rose 8% and there is plenty of cash available for dividends. The bad news is that full year GAAP earnings are still negative and outlook is tepid. Shares of the stock tried to rally but failed, capped at the short term moving average, and confirmed resistance at the short term moving average.

The Indices

The indices did a whole of nothing again today. A little up, a little down, a lot sideways and all on below average volume. The only index to move more than a very marginal amount was the Dow Jones Transportation Index which gained a little more than 0.50%. The transports, despite the gains, remain trapped within their long term range and do not appear like it will break out in tomorrow's session. The indicators are rolling into a bullish signal but it's not a strong one and are, overall, still consistent with range bound trading. There may be a test of resistance at the 8,150 level, a break above that will be suspect unless driven by positive catalyst and/or a high volume market day.

The other indicators all closed with moves of less than a tenth of a percent, the Dow Jones Industrial Average in negative territory. The blue chips lost -0.10% in today's session, creating a very small spinning top doji candle. This is the 38th day the index has traded within the current, very narrow, trading range. The indicators remain consistent with this range if biased toward the downside and suggestive a test of support may come.

The S&P 500 closed with a loss of 0.01% and created a very small doji like candle, near the bottom of its trading range. The index remains range bound with indicators consistent with this assessment. The current indication is down so there may be a test of support, near 2,120, with a possible move down to 2,100 but not much further, at least for tomorrow.

The NASDAQ Composite posted a loss of -0.02% at the close. The tech heavy index created a small black bodied candle, spinning top-ish, near the bottom of the 6 week consolidation range. Today's action appears to be confirming a drop below support targets at the previous all time high and the indicators support it but a move below the bottom of the range, near 5,150, does not seem likely at this time, at least not for tomorrow. If so it would be bearish and could take the index down as low as 5,025.

The only thing for certain in the market right now is uncertainty. Earnings outlook is good but uncertain due to the FOMC, the election and the economy. The FOMC meeting brings uncertainty because of rate hikes and their affect on the market, the dollar and the economy. The election, and the email scandal, bring uncertainty of such enormous proportion it is hard to quantify. Needless to say I am very cautious this week. I still the signs a prolonged rally is on the way, we just have to get past the next 9 days and see what happens. Don't forget; we've got the FOMC on Wednesday, the NFP/Unemployment on Friday, the Election next Tuesday and the emails hanging over it all.

Until then, remember the trend!

Thomas Hughes

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New Plays

Out of Favor

by Jim Brown

Click here to email Jim Brown
Editor's Note

Ebay is in the midst of a long downturn thanks to Amazon, Walmart and others taking over the online retail space. Ebay used to be the place to sell new and used products but now the big retailers have forced those new products out of Ebay.


No New Bullish Plays


EBAY - Ebay Inc - Company Profile

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Sell short EBAY shares, currently $28.51, initial stop loss $29.70

Optional: Buy Dec $28 put, currently .76, no initial stop loss.

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed at the unchanged level with the exception of the Dow and Russell 2000. The Dow gave up a midday gain to close near the lows but with a loss of only 18 points. The Russell held its midday gains and actually rallied into the close. Big caps weakened and small caps strengthened. What is a trader to do?

The earnings news was mixed and the election news was uninspiring. The candidates have battled to a draw and the markets held at unchanged while portfolio managers waited for October to be over so they could start a new fiscal year on Tuesday.

That could be a blessing or a curse. We do not know if funds went into the fiscal year end fully invested or heavy in cash. If they were fully invested, we could see some window undressing over the next six days as they go to cash until a winner is declared. If they were cash heavy, they may decide to try some bottom fishing over the next week and bet on the election outcome.

Market direction on Tuesday could be telling. Whichever direction we go tomorrow could be our direction for the next week.

The markets broke even for the day and we did as well. The CC position was stopped out for a $1.30 gain and the HLX position was stopped for a -$1.33 loss.

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

CC - Chemours
The long stock position was stopped at $16.75.

HLX - Helix Energy
The long stock position was stopped at $8.85.

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BULLISH Play Updates

CC - Chemours - Company Profile


No specific news. Shares collapsed after a new high on Friday. We were stopped out at $16.75. We will look at reentering this position after their earnings this week.

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.

Update 10/28/16: A reader sent me this info this weekend. Thanks DS!

Further to your post on CC. R-134 freon an HFC which is most widely used on vehicles / equipment from 1994 to present cost about $5-7 per pound average vehicle requires 2-3 pounds.

The new Freon R1234 costs about $110 – $120 per pound. The R1234 is an HFO base and breaks down in the atmosphere in about 12 hours, R-134 breaks down in about 1 Year.

R-1234 has been used in Europe for the past 4 years, and introduced in North America in 2015 in some models, more models in 2016 and mandatory in all 2018 vehicles and equipment.

CC has no where to go but up. 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

Closed 10/31/16: Long CC shares @ $15.45, exit $16.75, +1.30 gain.

HLX - Helix Energy Solutions - Company Profile


Crude prices collapsed $2 after the OPEC meeting over the weekend failed to reach an agreement on anything. We were stopped out at $8.85.

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:

Closed 10/31/16: Long HLX shares @ $10.18, exit $8.85, -1.33 loss.

MENT - Mentor Graphics - Company Profile


No specific news. Minor gain in a weak market.

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

FINL - Finish Line - Company Profile


Nike shares were cut to a sell by Goldman this morning and the shares fell -3.5%. The idea is that competition is increasing and profit margins are falling. That could both help and hurt Finish Line. Lower prices and more selection means more customers. Lower prices and more selection means higher inventory levels and lower margins.

Original Trade Description: October 29th.

The Finish Line, Inc., operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

The Under Armour warning of slowing sales growth and weaker profits may not hamper Finish Line directly but it is a warning for the industry in general. The ever rising price of shoes and the rising cast of star endorsements means more shoe models and more buyer confusion. The high dollar shoe market may be about to tank.

Finish Line has fallen from $24 to $20 over the last month and the UA warning only added to the stock's decline. Earnings are not until December 23rd so the stock has a long time before it can prove the naysayers wrong. Support is $17.

Position 10/31/16 with a FINL trade at $19.50

Short FINL shares @ 19.50, see portfolio graphic for stop loss.
Target = $17.

SHLD - Sears Holdings - Company Profile


No specific news. The warning from L Brands tonight could depress Sears on Tuesday.

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


No specific news and only a minor rebound.

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


VXX up in a down market as traders buy puts because of the election uncertainty.

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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