Option Investor

Daily Newsletter, Tuesday, 11/1/2016

Table of Contents

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

Market Wrap

Trick or Treat

by Jim Brown

Click here to email Jim Brown

Investors may be looking at the election next Tuesday as an adult version of Trick or Treat.

Market Statistics

As the election polls tighten and the rhetoric increases to a fever pitch, the market is reacting more forcefully to the trend over the last couple weeks. The trend has been lower as the polls tightened but this morning an ABC national poll showed Trump in the lead by 1 point. While that could change at any moment, he was down -12 points just two weeks ago. The momentum is definitely in his favor and the market reacted negatively.

The market had priced in a Clinton win and the republicans maintaining control of the House effectively insuring gridlock and the status quo for another two years. Suddenly, that scenario has run off the rails with the steady drip, drip of the WikiLeaks documents and the return of the email scandal in a big way.

Now that fund managers are in a new fiscal year they are free to dump stocks and raise cash so they have some dry powder to use after the election. Certain sectors will do either better or worse depending on who wins. Managers are now free to raise cash to make those bets once the winner is declared.

The market performance today was entirely different that what the futures were showing last night. The S&P futures were up +8.75 late Monday night. The reason for the overnight bounce was Asian economics. China's government PMI index for October jumped to 51.2 compared to estimates for 50.4, which had been the actual reading the prior two months. Meanwhile the Caixin manufacturing PMI also rose to 51.2 in October and the fastest pace of improvement since March 2011. A rebound in new orders and stronger demand were the main drivers. The Caixin report focuses on mid-sized companies not in the government survey.

China's services PMI for October rose from 53.7 to 54.0 and the second monthly gain. The combination of the three reports suggests China's economy is starting to improve. The GDP held steady at 6.7% for Q2 and Q3. Also, September producer prices rose for the first time in almost five years.

The Bank of Japan kept policy unchanged and rates at -0.1%. Bond purchases will remain at the same rate at an annual pace of 80 trillion yen. Several economic reports weakened but the overall outlook remained positive so the BoJ did not feel the need to change policy.

The combination of those Asian economic reports above lifted the U.S. futures and it looked like we were in for a strong open in the USA. By the time morning rolled around the indexes were in decline mode and the Dow hit -201 at the lows of the day. If you do not like the market action just go to coffee. When you get back, it will have changed.

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The U.S. economics were mixed and did not give the Fed any support for a potential rate hike in the near future. Construction Spending for September fell -0.4% after a -0.7% decline in August. Consensus estimates were for a +0.5% gain. Public construction fell -0.9%. Private construction fell -0.2%. Nonresidential construction fell -0.9%. Overall spending is now down -0.2% from the same period in 2015.

The ISM Manufacturing Index for October rose slightly from 51.5 to 51.9. The internal components were mixed and suggested weakness ahead. New orders declined from 55.1 to 52.1 and order backlogs fell from 49.5 to 45.5. The inventory component fell from 49.5 to 47.5 making it the 15th consecutive month in contraction. The highlight was the employment component with a rise from 49.7 to 52.9 and the first time over 50 since June and the highest reading since June 2015. The rising dollar is causing a problem for the manufacturing sector and it is not likely to end soon.

Vehicle sales rose from 17.76 million to 18.29 million on an annualized basis in October. This was the second month the actual numbers beat expectations, which were 17.4 million for October. This pace of manufacturing is not sustainable. Once the pent up demand has been satisfied we could see a significant reduction. However, the average age of a vehicle in the U.S. today is 11 years. That means a lot of cars are going to need replacement in the near future.

Auto sales rose from 7.24 million to 7.27 million. Light truck and SUV sales rose sharply from 10.51 million to 11.02 million. You can thank the low gasoline prices for that surge. Imported vehicle sales rose from 3.61 million to 3.72 million for 20.3% of total vehicle sales. The average incentive per vehicle declined from September's record $3,921 to $3,726.

Moody's Chart

The outlook survey for the Texas Service Sector declined from 13.0 to 9.9 with the survey components weakening. Revenue fell from 13.0 to 9.9, employment from 4.4 to 2.7, hours worked down from 3.1 to -1.4, wages and benefits down from 15.4 to 12.8 and selling prices down from 3.9 to 3.7. The retail sales component fell from 2.0 to -6.6 and a major drag on the headline number. The Texas service sector is starting to benefit from the rebound in the energy sector but the uptick will be slow compared to the activity level in early 2015. The number of active rigs in Texas remains near a 20-year low.

Tomorrow's calendar has the ADP Employment and the estimate has risen from 160,000 to 165,000 since last week. The Nonfarm Payroll consensus has also risen by 5,000 to 175,000.

The FOMC announcement will likely be ignored because there is almost no chance of a rate hike ahead of the election in a weak economy. They will however, point to December as a potential rate event.

Valeant Pharmaceuticals (VRX) hogged the news headlines in the morning and the evening. This morning shares were down -12% after news broke that former CEO Michael Pearson and CFO Howard Schiller are the subject of a U.S. criminal probe in the Philador scam. This is where Valeant sold large volumes of drugs to Philador and to other phony pharmacy companies Philador had set up. This enabled Valeant to maintain its revenue levels according to the current theory. At one point Valeant had an option in place to buy 100% of Philador as this scam was in progress. It is unknown if the company is also likely to be charged.

Late in the day, news broke that Valeant was close to a deal to sell its Salix component for $10 billion to Takeda. Shares immediately spiked more than 30% as all the morning's shorts were crushed. The deal is expected to produce $8.5 billion in cash plus future royalty payments. After the bell, Valeant said it was an open bid process for multiple divestitures and there were additional interested parties.

Valeant has a market cap of only $8 billion after losing -$70 billion in capitalization when the stock crashed. They have $32 billion in long-term debt plus another $8 billion in committed payments for royalties, options, pensions, etc. They need to generate a lot of cash quickly and $10 billion is a good start.

Pfizer (PFE) reported earnings that fell -38% to 21 cents. Adjusted earnings of 61 cents missed estimates by a penny. Revenue rose 8% to $13.045 billion and missed estimates for $13.055 billion. They guided for full year revenue of $52.0-$53.0 billion, up from $51-$53 billion. They guided for earnings of $2.38-$2.45, which was less than the prior $2.38-$2.48. Analysts were looking for $2.46 and $53.1 billion. Shares declined slightly on the news.

Yum Brands (YUM) closed Monday at $86.28 and opened this morning at $62.21. It was not an earnings drop. The spinoff of Yum China (YUMC) occurred and the YUMC shares began trading post spin at $24.50. The Yum China company is going to be the growth company while Yum Brands will be a slow growth high cash flow entity focused on the U.S. market. I am betting Yum US is also going to see its stock decline.

Anadarko Petroleum (APC) reported a loss of 89 cents that was bigger than the analyst estimates for a loss of 57 cents. Revenue rose 12.1% to $1.89 billion and missed estimates for $2.19 billion. The company raised its monetization target again from $3.5 billion to $4.0 billion in 2016. Shares rose on the earnings news despite another drop in oil prices.

Johnson Controls (JCI) was added to the Goldman Sachs Conviction Buy list now that the spin-off of its Adient unit is complete. Adient produces automobile seating components. JCI began trading post spin on Monday at $39.

Tenet Healthcare (THC) reported earnings of 16 cents that missed estimates for 19 cents. The worst news was the guidance. The company guided for Q4 earnings of 17-22 cents and analysts were expecting 54 cents. Shares fell only -3%, which I thought was very surprising. I would have expected -30%.

After the bell, Square (SQ) reported a loss of 9 cents and analysts were expecting a loss of 11 cents. Revenues of $439 million beat estimates for $431 million. The company raised its full year revenue guidance from $1.63-$1.67 billion to $1.695-$1.70 billion. Analysts were expecting $1.68 billion. The company said the total value of payments processed rose 39% to $13.2 billion. Analysts were expecting $12.47 billion. Shares gained 50 cents in afterhours.

Gilead Sciences (GILD) reported earnings of $2.75 compared to estimates for $2.86 per share. Revenues of $7.50 billion did beat estimates for $7.45 billion. Hep-C drug sales of $3.33 billion missed estimates for $3.7 billion. Harvoni had revenues of $1.9 billion that were lighter than expected because of falling demand now that there are multiple Hep-C drugs on the market. Expectations for Q4 are only $1.1 billion in the U.S. and $776 million overseas. Gilead shares were volatile after the close, trading between $71 and $75 but ending down only -90 cents at $73.22. Analysts have been expecting Gilead to announce some big acquisition with their huge cash hoard of $30 billion but nothing was announced. They did announce a dividend of 47 cents payable December 29th to holders on December 15th.

Electronic Arts (EA) reported earnings of 56 cents compared to expectations for 43 cents. Revenue of $1.1 billion beat estimates for $1.09 billion. They guided for the current quarter to revenue of $1.13 billion and that was well below estimates for $2.07 billion. Full year earnings guidance was $2.69 on revenue of $4.78 billion. Shares spiked $5 to $82.40 on the news.

Tableau Software (DATA) reported earnings of 16 cents that easily beat estimates for 7 cents. Revenue of $206.1 million missed estimates for $213.4 million. License revenue rose 7% to $116.7 million and they added 3,600 new customer accounts. Shares collapsed from $49.51 to $40 on the news but battled back to close at $45 in afterhours.

There was not a lot of earnings excitement today but on Wednesday, we will get Facebook, Alibaba and Qualcomm. That could provide a boost to the tech sector but Alibaba is the only one of the three reporting before the open. Facebook and Qualcomm are after the close.

The earnings excitement is fading fast as investors develop a defensive posture ahead of the election.

Apple (AAPL) shares declined to nearly $110 intraday on rumors iPhone sales in China were slowing. Strategy Analytics said Apple only managed to grab 6% of market share in China in Q3 compared to the 10% share it had in Q3-2015. The overall market rose in the number of units sold but Apple's share declined. To put it another way the difference was a 40% drop in market share. The problem Apple has in Asia is the one model per year program. With a dozen vendors each putting out 2-3 models a year, the market is swamped with Apple competitors and continuous offerings of new models.

There was another rumor making the rounds that the Apple Macbook was also losing market share to Windows Surface. The new Surface product has gotten a lot of good reviews and it is cheaper.

Apple Air Buds are also rumored to be delayed until Q1-2017.

The Apple decline was a drag on both the Dow and the Nasdaq indexes.

Brocade (BRCD) continued to rally on expectations for an acquisition by Broadcom (AVGO). Reportedly, Brocade is in advanced talks to sell itself with multiple potential buyers in the discussions but Broadcom is said to be leading.

Crude prices continue to decline after a $2 drop on Monday. The much-hyped OPEC production cut is disappearing faster than M&Ms in a kindergarten class snack break. Nobody wants to cut and now it appears nobody will even agree to a freeze. The next meeting is Nov 30th and prices could decline further if the agreement evaporates.


The S&P has posted losses for the last six consecutive days. That is the longest streak in 2016. All the major indexes lost ground in October and this week is not looking good. The Russell 2000 is now down -7% from its 1,263 high in September and it has broken below critical support at 1,200. The small caps normally lead the market in both directions and they are leading us down at a high rate of speed. The Russell is unsupported at its current level and portfolio managers are likely moving out of the low liquidity small caps just in case there is a big market drop in the near future. When in doubt, follow the small caps.

The S&P lost -14 points and traded not only below critical support at 2,120 but also under 2,100 intraday. This is a major support break and everyone pointing at critical levels like 2,145, 2,130, 2,119 and 2,114 as critical technical support on the way down, have now run out of levels on which to place their hopes.

Jeffrey Gundlach said this afternoon that he believes the S&P could fall another 5% to 10% over the coming weeks. He is a big dog in the market and while his opinion is just another opinion, his seems to count. His key level was 2,130. He said two closes under 2,130 was the technical kiss of death.

The Dow traded well below 18,000 intraday but recovered to close just above that critical support level. I have no hope that it will continue to recover. I believe the lack of any Dow earnings this week and the post earnings depression cycle from the 26 companies that have already reported will continue to drag the Dow lower.

Add in the weakness in Apple and the election uncertainty and we could easily see significantly lower levels. However, the Dow has been resilient and while trading sideways it has refused to move lower. We may be reaching that point where the next headline will be the one that forces a breakdown below support.

The Dow traded in a very narrow 60-point range on Monday. That was a draw between the buyers and sellers and remarkable considering the volume was nearly 7 billion shares and 1 billion more than any day the prior week. This was a textbook pattern of distribution.

The Nasdaq Composite finally broke below support at 5,200 and nearly touched 5,100. Apple was a big drag but the index got some help from the biotech sector. Strangely, the biotech index was up more than 1% despite a tweet storm by Bernie Sanders attacking Lilly, Sanofi and Novo Ordisk for drug pricing. The biotech sector has been so depressed it must have looked like a safe port in the storm.

Now that 5,200 has broken, I expect the Nasdaq to continue lower and produce a test of 5,100 and a break there will not be pretty.

The VIX spiked through 20 intraday but declined -2 points into the close. However, I believe we will see higher highs, possible in the 25 range by next week. There are a lot of traders that have not converted to the possibility of an unexpected winner in the election.

I believe our election uncertainty will continue to rise and with 6 days left, that is a lifetime in the election cycle. That is six days where the lead could reverse literally every day. This could create some serious market volatility ahead of the election and possibly more volatility after the event.

I would continue to be cautious about being overly long and I would refresh your shopping list for stocks to buy on a dip.

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Enter passively, exit aggressively!

Jim Brown

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New Plays

Avoiding Whiplash

by Jim Brown

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Editor's Note

The markets appear to have picked a direction but it may only be short term. Markets that decline abruptly tend to rebound abruptly. Tightening poll numbers sent the markets on a wild ride on Tuesday. Unfortunately, it looks like we are headed for another dip on Wednesday with the S&P futures down -7 points as I type this. There is no reason for us to jump into the high volatility just so we can be stopped out a day later. I recommend we remain on the sidelines until the volatility eases.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Trapdoor Opened

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes have been telegraphing the market decline for the last week and today the whoosh occurred. The Russell 2000 closed down another -1.1% of -13 points on election uncertainty and fear of the Fed hiking interest rates. At least that is what the talking heads were saying. I believe it is the election uncertainty since a quarter point rate hike once a year has zero impact.

The polls are tightening and some now have Trump in the lead and the potential for legislative grid lock on a Trump win are shrinking. Portfolio managers would like to see Clinton win and the house and senate remain republican so the status quo remains in place. As that outcome fades from view the market will adjust to the alternative reality that could be a Trump presidency.

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

MENT - Mentor Graphics
The long stock position was stopped at $28.25.

FINL - Finish Line
The short stock position was stopped at $20.65.

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BULLISH Play Updates

MENT - Mentor Graphics - Company Profile


No specific news. Stopped out by 3 cents on the intraday dip to $28.22. The call position is still open but I did add a stop loss.

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:

Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss


Long Jan $30 call @ $1.35, see portfolio graphic for stop loss.

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


Ebay said it was selling its $1.37 billion stake in MercadoLibre (MELI). Shares declined anyway.

Original Trade Description: October 31st.

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.

Position 11/1/16:

Short EBAY shares @ $28.51, see portfolio graphic for stop loss.


Long Dec $28 put @ .72, see portfolio graphic for stop loss.

FINL - Finish Line - Company Profile


New four-month low close but we were stopped out on the spike at 1:30 when Bloomberg announced the company was looking for a buyer for their Jackrabbit running shoe chain. That produced a spike that was the equivalent of a bad tick but it was enough to knock us out.

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

Closed 11/1/16: Short FINL shares @ 19.50, exit $20.65, -1.15 loss.

SHLD - Sears Holdings - Company Profile


No specific news. The retail ETF was down big but Sears did not budge.

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. Nationwide Fund Advisors said they cut their stake in SSYS in Q3.

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 but dead stop at resistance at $36.

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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