Option Investor

Daily Newsletter, Saturday, 2/4/2017

Table of Contents

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

Market Wrap

Forget Last Week

by Jim Brown

Click here to email Jim Brown

Just pretend last week never happened because the markets closed almost exactly the same place as the prior Friday.

Weekly Statistics

Friday Statistics

Everything you need to know about the market can be seen in the first graphic above. Note the changes for the week for each index in the weekly graphic above. If that were your only picture into the market, it would appear nothing had changed. Of course, if you were paying attention all week you would have seen the -27 point decline in the S&P at Tuesday's low and the -307 point decline in the Dow. Those are some big numbers but they were completely erased by the short squeeze on Friday.

Despite the rebound, the indexes are still at lower highs with the exception of the Nasdaq, which closed at a new high. The Dow gapped up to 20,071 on Friday and then traded sideways the rest of the day to close at 20,071. Yes, that overhead resistance from the prior week is still intact.

Friday's short squeeze was powered by the resumption of the Trump rally and strong economic numbers. The financials exploded higher after comments from the Trump team they were about to reverse some of the regulations in the massive Dodd-Frank bill that is crippling the banking system. The strongly hated Fiduciary Rule in Dodd-Frank that limits investments in retirement accounts was first on the chopping block. The rule required financial professionals to advise investors toward the lowest commission, least risk products and away from products that had higher commissions and potentially higher returns. It sounds like a good idea in theory but it was crushing the business and causing significant rotation of client funds in order to comply with the rules. The industry said it actually added costs to low dollar accounts and would ultimately make small accounts unprofitable.

The four financial stocks in the Dow were the biggest gainers and those four stocks alone added 125 points to the Dow.

The economic news came from the Nonfarm Payrolls for January. The headline number of 227,000 new jobs was well above expectations for 167,500 but not quite as strong as the ADP Employment report from Wednesday. The ADP number was a blowout at 246,000 new jobs compared to estimates for 165,000 and the 153,000 reported in December.

Big gains came from construction with 36,000 new jobs and leisure/hospitality adding 34,000. Retail saw a gain of 46,000, which is surprising given the onslaught of bad news out of the sector over the last month. Even more surprising the retail number from December was revised higher from 6,000 to 34,000. Analysts theorize the January number was stronger because the normal holiday hiring was weak. That meant fewer layoffs in January, which caused the normal seasonal adjustments to show a higher total.

Manufacturing and Mining (energy) added 9,000 jobs. Financials added an unusual 32,000 jobs in January when some of the big banks were actually cutting back on costs.

The only negative news in the jobs report was a minor +0.1% gain in average hourly earnings. Since the higher minimum wage took effect in multiple states in January, there was an expectation for wages to be a little bit stronger.

The labor force saw a gain of 76,000 workers and the participation rate rose 2 tenths to 62.9%. The unemployment rate rose one tenth to 4.8% because of the rise in the workforce.

January is the annual benchmark revisions to the prior year data. This year there were very small revisions and the first three months of the year were so small I did not include them in the table below.

The top line is the most current numbers plus the revised numbers from the past months. The second line was the prior revision, third line the prior and fourth line the original release. The payroll numbers are normally revised in each of the two months following the first release. Then they are revised again in the benchmark revisions in January. The benchmark revision for all of 2016 accounted for a net of only 88,000 additional jobs. That unbelievably low compared to prior benchmark revisions in years past. The Nov/Dec revisions are the normal month-to-month changes and they accounted for a decline of 41,000 jobs from the previously reported numbers.

Market analysts were mixed on whether the strong jobs would encourage the Fed to move forward its rate hike plans and begin in March but most felt the Fed will pass. Evercore said there "was little need for the Fed to pull forward the next rate hike into March." BNY said analysts would be moving their expectations from March to June. Goldman Sachs said it reduced the chance of a March hike from 35% to 15% and now expects 3 hikes in June, September and December. Societe Generale said there was now no pressure on the Fed to accelerate rate hikes into March. Bank of America said the chance of a hike in March is now fairly low and they only expect one hike in September, with the potential for a second. However, Prestige Economics said "A March rate hike is now a lock" after the strong jobs support. ING said the jobs confirmed their expectations for a March hike.

The CME FedWatch tool is now showing only an 8.9% chance of a hike in March, down from 24% a week ago.

The Atlanta Fed GDPNow for Q1 was just released and they are projecting a whopping 3.4% GDP growth compared to the 2.2% average growth projection by 20 top forecasters and their own 2.3% forecast on January 30th. The sharp revision was due to the strong ISM Manufacturing report and Construction Spending report.

The chart looks strange because they do not start adding their own forecasts until the prior quarter GDP is released by the Bureau of Economic Analysis. That happened on January 27th with a 1.9% growth rate for Q4.

The GDPNow will undergo dozens of revisions over the next three months and most analysts seriously doubt the 3.4% forecast.

The ISM Nonmanufacturing Index for January declined slightly from December's previously reported 57.2 to 56.5 but still well into expansion territory. However, December was revised down to 56.6 so it was basically unchanged. New orders rose from 54.2 to 59.9 but backorders fell from 50.0 to 47.5. The employment component improved slightly from 49.7 to 52.7. The services sector has been doing ok with no contraction readings since December 2009. The nonmanufacturing segment of the economy accounts for 88% of nominal GDP.

December factory orders for manufactured goods rose +1.3% and considerably better than the -2.3% decline the prior month. Analysts were expecting a 1.0% rise. Factory shipments rose 2.2% compared to 0.3% in November. The headline number was impacted by a -33.5% decline in defense orders. This was a good report but it was ignored.

The calendar for next week is devoid of any market moving reports. There are only four Fed speakers. This will be a quiet week for economic events.

Earnings are also starting to slow down but there are two Dow components, Disney and Coca Cola. On the S&P, 84 companies will report. Tesla is probably going to be the most watched report since they now have a full quarter of SolarCity results. They officially changed their name last week from Tesla Motors to Tesla Inc.

YUM Brands and YUM China report so it will be interesting to compare the results again. Twitter will report on Thursday but they are only an afterthought these days. If it were not for Trump keeping the activity alive with the tweets and re-tweets of his comments, the news volume would be a lot lower. Analysts believe there is a known buyer in the wings that is waiting for Twitter to reduce expenses significantly and post multiple quarters of results from the Twitter Live product, before they surface with a new public offer. Unfortunately, analysts believe it could be in the $15 range.

More than 55% of S&P companies have reported earnings and 65% have beaten on earnings while 52% have beaten on revenue. The current blended earnings growth rate for Q4 is 4.6% and well above the 3.1% estimate on December 31st. The revenue growth rate is +4.6% and that is lower than the +4.9% forecast at the beginning of the quarter. Of those reported, 44 companies have issued negative guidance and 21 issued positive guidance. Since the Q4 earnings cycle began, analysts have only cut Q1 estimates by -1.5% and that is less than the historical -2.5% average at this time. This suggests analysts are positive about the guidance they have been seeing. Upgrades to estimates for the energy and financial sectors are responsible for the better than average revisions.

The percentage of companies beating on earnings at 65% is lower than the 71% average. The percentage of companies beating on revenue at 52% is only lower than the 53% average. The average earning surprise of 2.5% is below the 4.4% average. There are fewer companies beating by a smaller amount but the difference is still minimal at this point.

There were very few major companies reporting earnings on Friday. Clorox (CLX) reported earnings of $1.25 compared to estimates for $1.22. Revenue was $1.41 billion and that matched analyst estimates. They guided for the full year for earnings of $5.23 to $5.38 per share, down from the prior forecast for $5.23 to $5.45. Volume rose 8% and international sales offset domestic declines in the cleaning and lifestyle segments. Shares rallied $5 on the news.

AutoNation (AN) reported earnings of 95 cents that missed estimates for 98 cents. Revenue of $5.48 billion also missed estimates for $5.62 billion. The company has now missed revenue estimates for seven consecutive quarters and only met earnings targets in one of those quarters. Competitive pressure cut more than $100 from the profit of every car sold and the company said those pressures will remain in 2017.

Hershey (HSY) reported adjusted earnings of $1.17 that beat estimates for $1.08. Revenue of $1.97 billion missed estimates for $1.99 billion. They guided for 2017 for earnings of $4.72 to $4.81 and analysts were expecting $4.64. The company said a -16.6% drop in sales in China weighed on the results. Hershey said they have not yet discovered the nuances of chocolate flavors desired by Chinese consumers.

The company announced a dividend of 61.8 cents for the common stock and 56.2 cents on the Class B stock. The dividends are payable March 15th to holders on February 24th. This is the 349th consecutive regular dividend on the common stock and 130th on the Class B stock.

There were a lot of extreme reactions to earnings posted after the bell on Thursday. These were some of the major moves.

Hanes Brands (HBI) reported earnings of 53 cents and missed estimates for 58 cents. Revenue of $1.58 billion missed estimates for $1.69 billion. Shares crashed 16% on the news.

GoPro (GPRO) reported earnings of 29 cents that beat estimates for 21 cents. However, revenue of $540.6 million missed estimates for $576 million. The company guided for revenue of $190 to $210 million for Q1 and analysts were expecting $267.6 million. Shares fell 13% on the news.

Amazon (AMZN) reported earnings of $1.54 that beat estimates for $1.40. Revenue of $43.71 billion missed estimates for $44.87 billion. Revenue rose 22% but still missed estimates suggesting the estimates were too high. The company guided for Q1 revenue of $33.25 to $35.75 billion and analysts were expecting $35.83 billion. Amazon bragged that their Prime members could now choose from over 50 million items with free two-day shipping. The company is spending more than expected in developing its air cargo project with 40 Boeing 767 cargo jets. They plan to spend $1.5 billion to build a new cargo center at the Cincinnati/Northern Kentucky Airport in Hebron Kentucky. The center will employ more than 2,000 workers. That is just part of the 100,000 workers Amazon plans to hire over the next 18 months. Amazon currently has more than 4,000 trucks and adding more every day. Shares declined $30 on the earnings news.

Amgen (AMGN) reported earnings of $2.89 that beat estimates for $2.79. Revenue rose 8% to $6.0 billion that beat estimates for $5.74 billion. For 2017, they guided for earnings of $11.80 to $12.60 and analysts were expecting $12.46. They guided for full year revenue of $22.3 to $23.1 billion compared to estimates for $23.3 billion. They announced positive data on cholesterol drug Repatha that has shown to reduce heart attacks and strokes for people with high LDL or "bad" cholesterol. Recent sales were only $30 million because 75% of the prescriptions were rejected by insurance companies while they awaited further proof of results. This should boost sales in 2017. The drug is injectable twice a month and costs $1,148 a month at discount pharmacies for just two doses. Shares rallied $8.

FireEye (FEYE) reported an adjusted loss of 3 cents that beat estimates for -16 cents. Revenue of $184.7 million missed estimates for $191.1 million. They guided for the current quarter for revenue of $160-$166 million and analysts were expecting $177.5 million. Shares crashed 16% on the news.

Chipotle Mexican Grill (CMG) reported earnings of 55 cents that missed estimates by 2 cents. Revenue of $1.03 billion missed estimates for $1.04 billion. Same store sales declined -4.8% for the quarter but rose 25% for January. The chain is trying to bring customers back in with constant offers of free food but winning them back after multiple food borne problems has been difficult. Shares fell $19.

Visa (V) was the big winner on earnings. They reported 86 cents compared to estimates for 78 cents. Revenue of $4.5 billion rose 25% and beat estimates for $4.278 billion. Q1 payment volume rose a whopping 47% to $1.9 trillion. Visa guided for 16% to 18% revenue growth for 2017. Shares rallied $4 to help lift the Dow.

Tableau Software (DATA) reported earnings of 26 cents on revenue of $250.7 million that beat estimates for 13 cents and $230.3 million. License revenue rose 14% to $152.2 million. They added more than 4,000 customer accounts and closed 589 transactions greater than $100,000. That was a 42% increase from the year ago period. Shares spiked 15%.

Macy's (M) is reportedly in acquisition talks with Hudson Bay Co (HBC.TO). Discussions are in the early stages and they could reach a deal that does not include an outright purchase of the struggling Macy's chain. Macy's has been selling off real estate in small quantities to appease activist investor Starboard Value LP, which has been pressing the company to consider other strategic alternatives. Hudson Bay owns the Saks Fifth Avenue and Lord & Taylor brands as well. Macy's currently has about 730 stores but only half are in the best malls. They announced plans to cut 6,200 jobs in January and close 100 stores. Macy's $10 billion market cap is about 7 times larger than Hudson Bay. Shares spiked 6% on the news.

According to a Bloomberg survey OPEC produced 32.3 million Bpd in January after they cut 840,000 bpd from their output. The 10 OPEC countries that agreed to cut production were only 83% successful. Production increased in Iran, Libya and Nigeria in accordance to the agreement. Combined they produced an extra 270,000 bpd. Libya increased production to 690,000 bpd and the highest level in more than two years. They are trying to get back to the 1.6 mbpd before the civil war began. That means OPEC is still 550,000 bpd above their production cut target. Bloomberg produced this graphic showing who met their targets and who did not. Those that exceeded the target cut an extra 270,000 bpd but the rest of the pack failed to keep up.

If you remove the three countries that cut more than required, the remaining countries are only about 65% in compliance and that is historically about where OPEC has seen compliance peak in the past.

Russia said it cut production by 117,000 bpd and would try to reduce supply by the agreed 300,000 bpd by the end of June when the agreement expires. I am not holding my breath.

Oil prices have been trading in a narrow $3.50 range for the last month while everyone waited to see if OPEC was going to pull off a miracle. With roughly 65% compliance and three other countries adding 270,000 bpd, the odds of reaching full compliance are nearly zero.

The U.S. active rig count surged another 17 rigs last week to a 16-month high of 729. All the land rigs added were oil rigs. Seventy rigs have been reactivated over just the last three weeks. This is going to result in a sudden surge of oil about six months from now and the same time the OPEC production cuts expire.

Institutional investors are holding record net longs in the WTI futures contracts. This may not end well.




You have heard of the Midas touch that turned everything to gold. On Friday, the markets were touched by Goldman and everything turned green. Goldman's $10.50 rally added more than 71 points to the Dow and that opening spike kicked the financial sector and the short covering into high gear.

Goldman traded below initial support at $230 on Tuesday and Thursday but came roaring back on the news Dodd-Frank and the fiduciary rule were going to be tamed.

Add in Visa, JP Morgan and American Express and that accounted for nearly 70% of the Dow's gain. The opening spike forced ETF shorts to cover and we were off to the races.

However, the Dow never reached the finish line. The index came to a dead stop at 20,070 with only a slight flirtation with 20,080 at the close. I am going to reprint the chart I showed at the beginning of this commentary because it shows the market movement so perfectly. It was a short squeeze with a dead stop at resistance. There is no other way to describe it. Everyone continues to hope that we will get a decent pullback as a buying opportunity. The four-day market dip in the chart below is about all we are going to get given the current state of market sentiment.

We could move higher next week but it will need to be powered by some new stimulus and I don't know what that will be. We know from the prior week that resistance is strong and with only two Dow components reporting late in the week, there could be a lack of motivation. We are also approaching that point in February where the post earnings depression phase normally appears. All the big names have reported and there is a lack of targets for traders to buy ahead of the remaining earnings. Those stocks already reported, suffer from investor flight as traders take profits and move on to some other strategy.

I would like to predict the Dow will blast through that resistance but without some new headline, it could be really tough. We have not had a market moving presidential tweet in several days so there is always that possibility over the weekend. Who know which world leader will cause the next tweet storm? I am hoping the president will realize that tweets can have negative consequences and tone down the rhetoric somewhat. Remember the immigration ban from last week that caused the market to decline on Monday.

On the S&P the 2,299 level was strong resistance for three days last week. I wrote that the 2,300 level on the S&P was the new Dow 20,000 because that is where the all the attention will now be focused. The S&P gapped open to 2,298 and closed at 2,297 after being unable to gain any additional ground the rest of the day.

We did form two new support levels last week at 2,275 and 2,268. If we do take another trip down memory lane next week, those levels should provide at least a brief pause.

I am shocked that Amazon's $31 decline did not hold the Nasdaq back. The index did post a rather sedate gain of 30 points but that was enough to close it at 5,666.77 and a new record high. The prior high was 5,660. The Nasdaq has been the market leader for weeks and it was helped by the transportation, biotech and financials on Friday. Yes, there are financials in the Nasdaq that make up 9% of the index. It is thought of as a technology index and that is 42% of the weighting. Support is now 5,625 and 5,580.

Biotech stocks had a good week with the Biotech Index ($BTK) gaining 3.7%. It was the only index to rise triple digits. The week started with the president meeting with pharma CEOs at the White House and promising to cut regulations and taxes and get drugs approved faster. That was the start of a good week and major support for the Nasdaq.

The Russell 2000 was also buoyed by the short squeeze in the financials and the index posted a 1.5% gain to close just over prior resistance at 1,375. The index has not been able to retest the 1,388 level in four weeks. The Russell has been the weakest index and we need it to take the lead again.

It seems like every weekend recently we have been at a critical point in the markets. This weekend is no different. The Dow and S&P are at resistance highs. The Nasdaq did close at a new high by 6 points but that might as well be a resistance high. The Russell is lagging and the Dow Transports were imploding until the Friday short squeeze.

Last Friday the S&P closed at 2,294 and this Friday at 2,297. The market tried hard to sell off throughout the week and was unable to break support. It looks like we are going to test resistance next week. A breakout at these levels could cause significant short covering because there is very little confidence in a continued rally. I know that sounds strange since we have been unable to produce a meaningful decline but a lot of investors are still not convinced. I get emails every week from readers still short and asking why the market is not going down. I tell them because there are more people looking for a dip to buy than a spike to sell but they are convinced we are going lower. Eventually they will get their correction but it may be from a lot higher level.

Random Thoughts

The markets were down early in the week and this survey closes on Wednesday. After weeks of sentiment imbalances, all three positions have moved to where they are almost equal. That is a clear sign there is no conviction in either direction. The bears probably have the edge this week because the market was down on Monday and Tuesday.

Last week results

Sucking up to Trump. I had to read this more than once it is so unbelievable. Japan is preparing a package to submit to President Trump next week, to create 700,000 U.S. jobs. The concept is that Japan will use its foreign exchange reserves to invest in infrastructure projects in the U.S. to avoid being labeled a currency manipulator. Prime Minister Shinzo Abe will meet with the president on February 10th in Washington to present the package. This is truly stranger than fiction. Source

A little over a month ago, Barron's published an article headlined Get Ready for Dow 20,000. Since the Dow was about 19,900 at the time it was not that big of a deal but the cover got the normal ridicule. They say you can tell when the market has topped when newspapers and magazines begin to run giant headlines about the new highs.

The market did not crash and did close over 20,000. For an encore, Barron's has an article this weekend on "Next Stop Dow 30,000." No, they are not predicting 30,000 over the next several weeks or even in 2017. They are predicting this by 2025. That is eight years from now and an eternity in market time.

The key point here is that while that sounds crazy, that is only a 5.5% annual average gain. I think they could be right. There will be some years with smaller gains but there should also be some years with larger gains if we get the expected tax cuts and don't end up with a trade war or a real war.

The current pro business administration could actually produce several strong years in the market if they stick to the programs they have outlined and not get sidelined in the minutia. They should take President Obama's favorite saying to heart. "Don't do stupid stuff." If they stuck to that motto, we might even get there before 2025.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Reality is merely an illusion, albeit a very persistent one."

Albert Einstein


New Plays

Real Profit Taking

by Jim Brown

Click here to email Jim Brown
Editor's Note

Many stocks that rallied after the election have failed to correct and buying them at the top could be risky. That is not the case with AK Steel. They had a real post earnings correction and appear to be ready to run again.


AKS - AK Steel - Company Profile

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Buy AKS shares, currently $8.13, initial stop loss $7.45

Optional long-term option: Buy June $10 call, currently 60 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Financial Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes gapped higher at the open due to monster gains in financial stocks. Are you detecting a pattern here? We go several days with no market movement and then suddenly a short squeeze appears and lifts the markets back to resistance.

The Russell posted a strong 1.5% rebound to close at 1,377 and just over the prior resistance at 1,375. That is still close enough to be in play and Monday's open will be critical. The Dow and S&P both rose very close to prior resistance by 11:AM but could not move higher the rest of the day. The Dow gapped open to 20,071 and five hours later closed at 20,071 having made zero upward progress.

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

No Changes

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

BOX - Box Inc - Company Profile


No specific news. New 52-week high close.

Original Trade Description: January 21st.

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

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.

CX - Cemex - Company Profile


No specific news. Shares are moving sideways and have not posted a consecutive gain since the 25th. I am tightening up the stop on the stock portion of the trade. If this sideways motion breaks lower, we will exit the stock portion but retain the call option. CX has earnings this week as well so that is another reason to be cautious. If we do not get any upward motion on Mon/Tue I will close the stock position ahead of earnings.

Original Trade Description: January 25th

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Earnings Feb 9th.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Position 1/26/17:

Long CX shares @ $9.42, see portfolio graphic for stop loss.

Optional: Long July $11 call @ 52 cents. No initial stop loss.

EMES - Emerge Energy Services - Company Profile


No specific news. Wow! Now that is what I call a real breakout with a 12% gain.

Original Trade Description: January 31st

Emerge Energy Services LP acquires, owns, operates, and develops a portfolio of energy service assets in the United States. The Sand segment is involved in the production and sale of various grades of industrial sand primarily used in the extraction of oil and natural gas, as well as in the production of building products and foundry materials. Company description from FinViz.com.

Emerge recently sold off its fuel division to Sunoco and it now a pure play on frac sand. According to analysts the demand for frac sand was in the 63 billion pound range in 2016. That is expected to grow to 107 billion pounds in 2017 and 146 billion in 2018. The prior peak was in 2014 at 106 billion pounds.

Selling a commodity that every energy producer needs is similar to store merchants getting rich during the gold rush by selling picks, shovels and wheelbarrows. There is very little risk in sand as long as energy prices are stable over $50.

Emerge raised $167 million through its sale of the fuel business and another $34 million in a secondary offering in November. Funds were used to acquire more sand and continue development of their SandMaxx technology, which is a proprietary fluid for keeping sand in a liquid state while fracking. Normally sand sinks in water so some sort of suspension liquid is needed to keep it in the fluid while it is circulated through the well.

Emerge pays a dividend that yields 15.25% at current prices.

Earnings Feb 23rd.

Shares were up on Tuesday despite a weak market.

Position 2/1/17:

Long EMES shares @ $18.45, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

FCX - Freeport McMoran - Company Profile


Freeport provided an update on the progress of negotiating with the Indonesian government on the new rules for exports the government put in place in January. Freeport warned that an unsuccessful outcome could reduce production by 70 million pounds of copper and 70,000 ounces of gold per month until approvals are received. This a high stakes game of chicken. The government wants to limit production and export of raw material and increase the amount that is smelted in Indonesia. However, there is not enough capacity at the jointly owned smelter and the mining companies do not want to commit millions of dollars to build a new smelter unless they are guaranteed an operating contract longer than five years, which is what the government is offering. The government is offering the option of a five-year extension but it is not guaranteed. Also, at the end of ten years the miners must have sold at least 51% of their business to Indonesian investors. So, spend millions to build a smelter, live under our austerity rules for the next five years and maybe we will let you continue but after 10 years controlling interest in your business belongs to Indonesia. Freeport has been fighting government rules for years and typically the government buckles because they need the export income and the jobs.

Original Trade Description: January 31st

Freeport-McMoRan Inc., a natural resource company, acquires, explores, and develops mineral assets, and oil and natural gas resources. The company explores for copper, gold, molybdenum, cobalt hydroxide, silver, and other metals, as well as oil and gas. It holds interests in various mines located in the Grasberg minerals district in Indonesia; Morenci, Bagdad, Safford, Sierrita, Miami, Chino, Tyrone, Henderson, and Climax in North America; Cerro Verde and El Abra in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo, Africa. The company's oil and gas operations include oil production facilities in the Deepwater Gulf of Mexico; oil production facilities onshore and offshore in California; onshore natural gas resources in the Haynesville shale in Louisiana; natural gas production from the Madden area in central Wyoming; and a position in the Inboard Lower Tertiary/Cretaceous natural gas trend onshore located in South Louisiana. As of December 31, 2015, its consolidated recoverable proven and probable mineral reserves included 99.5 billion pounds of copper, 27.1 million ounces of gold, 3.05 billion pounds of molybdenum, 271.2 million ounces of silver, and 0.87 billion pounds of cobalt; and its estimated proved oil and natural gas reserves totaled 252 million barrels of oil equivalents. Company description from FinViz.com.

Freeport has had its share of problem over the last couple years. They bought back their spinoff oil and gas company in 2014, just as the price of oil began to crater. They bought the dip and added additional reserves in the deepwater gulf but the dip was not over. They tried for a year at the worst of the market to sell the energy business and could find no takers. Finally in Q4 they sold the deepwater assets to Anadarko Petroleum for $2 billion and far less than they were worth but at least they stopped the bleeding.

The decline in the global economy caused prices for copper to fall sharply and they were forced to sell some copper reserves as well as some other mining properties. Copper was selling for less than it cost to mine it so mines shut down and the industry restructured.

After copper bottomed at $1.93 in early 2016 it remains just over $2.00 for nine months until the surplus inventories started to deplete. Copper was $4.50 back in 2011. With copper prices at a 52-week high this week, Freeport shares also made a new 52-week high today.

Freeport has also had a battle with the government of Indonesia. With copper a major export, the government implemented a program a couple years ago that only allowed refined copper to be exported. The idea was to have the multiple mining companies build huge copper smelters and hire a lot of workers at decent wages. The miners battled the government to a standstill several times and production slowed to a crawl. With copper revenue crashing the government relented to some extent. However, Freeport reported with earnings that the pressure was on again and they were going to be forced to shut down production if the government did not allow them to export. A multiweek standoff occurred. On Tuesday, the government said it was going to exempt Freeport from some of the rules and shares rose.

Freeport is actually in good shape right now. The global economy is accelerating and commodity prices are rising. They have reduced debt and refocused their priorities. I expect shares to continue climbing.

Earnings April 26th.

Position 2/2/17:

Long FCX shares @ $16.69, see portfolio graphic for stop loss.


Long April $18 call @ $.99, see portfolio graphic for stop loss.

BEARISH Play Updates

CONN - Conn's Inc - Company Profile


No specific news. No material movement. Still testing support at $10.

Original Trade Description: January 26th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 7th.

I believe Conn's will continue lower. Shares broke to a two month low on Thursday when support at $10.75 failed.

Position 1/27/17:

Short CONN shares @ $10.50, see portfolio graphic for stop loss.

No options because of wide spreads and no open interest.

FRED - Freds Inc - Company Profile


No specific news. No material movement. Barely holding on to support at $14.

Original Trade Description: January 23rd.

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full service pharmacies. The company, through its stores, offers household cleaning supplies, health and beauty aids, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 30, 2016, the company operated 641 company-owned stores, which included 60 express stores in 15 states and 18 franchised stores under the Fred's name, as well as 372 pharmacies and 3 specialty pharmacy facilities primarily in the southeastern United States. It also operates 18 franchised stores under the Fred's name. Company description from FinViz.com.

Freds has been in retail trouble for over a year. Their same store sales continue to decline since every grocery store, Walmart and Target in America has added a pharmacy. Shares had been in decline until Walgreens/Rite Aid agreed to sell Fred's 865 Rite Aid stores in an effort to get FTC approval for the WBA/RAD merger. That would make Fred's the third largest drugstore chain in the U.S. and shares doubled on the news.

A funny thing happened on the way to the merger. The FTC said last week they did not believe that was enough of a consideration to approve the merger. Walgreens has 8,200 stores and Rite Aid has 5,000 stores. Selling Fred's 865 Rite Aid stores was not enough. The combined WBA/RAD would have more than 12,500 stores to Fred's 1,500. CVS would become number two at 9,655 stores. The FTC believes the post merger environment would create two heavyweights that would dominate their respective areas.

Shares of Fred's have been in decline for a week on the worry the FTC will either block the merger OR they will be forced to sell a much larger block of WBA/RAD stores to Fred's and the company will not be able to complete the transaction or they will become too big too fast and begin losing money like crazy as they try to ramp up distribution and management to handle the suddenly increased store count.

Fred's announced a secondary offering on Friday to raise money for the acquisition. If the deal changes that causes additional problems. If the deal were to triple in size, Fred's would have to do another secondary to raise the additional cash and it could be a whopper of an offering.

Earnings March 9th.

I believe Fred's will continue to give back those monster gains from the December headline. If the WAG/RAD merger approval gets extended that creates more indecision for Fred's.

Update 1/26/17: The Walgreen's CEO said the company remains "actively in discussions" with Rite Aid about the regulatory concerns. We are discussing "all the instruments and actions we can put in place to facilitate this process." The merger agreement is set to expire on Friday and he did not say whether it would be extended.

Update 1/30/17: Walgreens and Rite Aid announced a restructuring of their merger agreement. Walgreens said in order to satisfy the FTC they may have to sell more stores, possibly a lot more. Fred's is contractually liable to buy any stores that Walgreens or Rite Aid decide to sell. Over the long term this would be positive for Freds but over the short-term it means they would have to take on more debt and probably make another secondary offering. That should be negative for the stock price.

Update 1/31/17: Evercore expressed doubt that Fred's could financially complete the acquisition of additional Walgreen's stores as required in the WBA/RAD merger. The new agreement contemplates Walgreens may have to sell an additional 335 stores. That is nearly 50% more than the 865 Fred's has already agreed to buy. Evercore said that may be too large of a commitment for Fred's.

Update 2/2/17: Fred's reported a 5.6% decline in sales for January and same store sales fell -4.8% compared to a 0.7% gain in the year ago period. Total sales for Q4, which ended on Jan 28th, declined -4.3% to $530.7 million. Q4 same store sales declined -3.6% compared to a +1.7% rise in the year ago period. They blamed everything and everybody for their sales decline including a drop in food stamp benefits, delayed tax refunds even though this was January, warm weather, mild cold and flu season, intense competition, a change in distributors for certain products, etc. Since none of the decline was their fault (sarcasm) the stock rose 4 cents instead of crashed.

Position 1/24/17:

Short FRED shares @ $14.97, see portfolio graphic for stop loss.

GNC - GNC Holdings - Company Profile


No specific news. Decent gain with high option volume. March call options for the $10 and $12.50 strike saw volumes that were half of the open interest. Somebody is looking for a big rebound.

Original Trade Description: January 28th

GNC Holdings, Inc., together with its subsidiaries, operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

Position 1/30/17:

Short GNC shares @ $8.77, see portfolio graphic for stop loss.

No options recommended because of the distance from the stock price. However, the Feb $7.50 put is only 25 cents. That might be an interesting lottery play to hold over their earnings report. If they get slammed on earnings again that could be a winner.

IWM - Russell 2000 ETF - ETF Profile


The Russell posted a strong gain but still closed well under resistance. The rebound over the last week probably doomed our position but I am not going to recommend a close until we see what happens on Monday.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


No specific news. New 14-year low on Thursday. Shares look like they are trying to build a base at $6.50 as they have been there for the entire week.

Original Trade Description: January 9th

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

We played Sears as a short several times before. We were stopped out on Dec-30th when the CEO arranged a bridge loan to get them out of trouble temporarily. Now that the holiday numbers are starting to come in, the results are very dismal. Sears is eventually expected to file bankruptcy.

In November, they posted a GAAP loss of $748 million and an adjusted loss of $333 million. Gross margins fell to 19.2% compared to JC Penny at 37.2%. Sears is forced to severely discount items to attract what few shoppers they have. Same store sales at Kmart fell -4.4% and -10% at Sears. Revenue fell -12.5% to $5.0 billion.

Earnings March 9th.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Dec-28th and the outlook is growing increasingly dim. Suppliers fear a bankruptcy in 2017 once the holiday shopping is over. Several suppliers have halted shipments to Sears on fears they will not be paid.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the sale of the Craftsman brand to Stanley Black & Decker for $900 million but they get less than half of that in cash. The rest is paid out over the next 3-5 years. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

With the Craftsman sale and the loan from the CEO and a new $500 million loan secured by real estate, they have developed about $1.5 billion in Liquidity. Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

When they announced the Craftsman sale at less than expected terms, the stock fell back from the early January gains. The outlook is grim despite the short-term cash inflows.

Update 1/11/17: In an OP-ED piece Forbes said the sale of Craftsman signaled the opening of the final chapter for Sears. They said the Craftsman sale and the potential sale of the Kenmore and Diehard brands represented a "going out of business" sale.

Update 1/19/17: Sears announced it was ending its decades old employee discount program. They are going to allow employees to earn points on purchases that will be good for future discounts. Currently they get a discount on items at the time of purchase. By scrapping that plan, the company gets the money up front and maybe the employee will use their points on future purchases. The point values differ on different types of merchandise. If Sears eventually files bankruptcy, the points would disappear. This is another sign the company is in trouble.

Update 1/21/17: Moody's downgraded Sears credit rating from Caa1 to Caa2. Moody's said Sears is running out of stuff it can sell for cash. They only have 211 properties that are unencumbered and worth about $2.5 billion. With the company burning cash at the rate of $1.5 billion they are rapidly approaching the end of the line. Moody's said they could raise cash with the sale of the Kenmore and Diehard brands but after that they are done. There is nothing left to sell that will produce a large inflow of cash.

Update 1/25/17: Fitch Ratings took another look at Sears and reiterated they expect a $1.6 billion cash burn for 2016 and $1.8 billion in 2017. The Barron's laid out the problems ahead for Sears and that tanked the stock on Wednesday.

Update 1/26/17: Moody's joined Fitch in another downgrade on Sears credit instruments. The debt instruments were cut from Caa2 to Caa3 because of accelerating cash burn and declining asset base. The WSJ had another article today negative on the outlook for Sears. Sales at companies like Mattel and Hasbro declined sharply in Q3 suggesting Sears and others did not reorder and earnings could be dismal.

Update 1/30/17: Sears announced a sale-leaseback arrangement with CBL & Associates for five Sears stores and two auto stores. A sale-leaseback is where the company sells the properties to raise cash and then agrees to lease them back from the buyer for a specific term. This is another sign Sears is continuing to have a cash crunch. This transaction leaves Sears with only 204 properties that are unencumbered and could be sold for cash out of the 1,680 stores they operate. Every time they sell a property they take on debt in the form of leases and that means the amount of cash burn increases with each deal.

Position 1/10/17:

Short SHLD shares @ $8.97, see portfolio graphic for stop loss.

No options recommended because of price.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now