Option Investor

Daily Newsletter, Thursday, 10/26/2017

Table of Contents

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

Market Wrap

Big Tech, Big Money

by Thomas Hughes

Click here to email Thomas Hughes


Big tech reported after the bell, the reports are good, expect big moves at tomorrow's open. Today's action was generally bullish with only the uncertainty of after-hours earnings reports and tomorrow's GDP announcement hanging over it. With that uncertainty gone there is little to stand in way of the bulls.

Asian indices were mostly higher on earnings with some isolated weakness. Gains were small, led by the Shanghai Composite's 0.33%. European markets were higher in the early part of the session and then extended those gains post-ECB announcement. The bank held rates steady, as expected, but was much more dovish than expected on inflation, the taper, the length of QE and how long interest rates would remain low. Most indices in this region gained an easy 1%+, lagged by the FTSE's less substantial 0.53%.

Market Statistics

Positive vibes were flowing through the market from the earliest although there was restraint; yesterday's sell-off was shrugged off in favor of positive earnings, EU stimulus and economic data but there was no massive rebound.The SPX opened with a gain of about 3 points and then extended that to roughly 6 points within the first 20 minutes of trading. This turned out to be intraday top, capping gains and leaving the indices trending sideways within a tight range. Unlike most days after hours news dominated today's action and will likely lead to some big moves at tomorrow's open.

Economic Calendar

The Economy

Initial claims for unemployment rose 10K from last week's low, last week's figure was revised higher by 1,000. The four week moving average of claims fell by -9,000 to 239,500. On a not adjusted basis claims rose 4.5% to 214,749 and are down -9.4% over this same time last year. Based on this week's data claims have not only recovered from the hurricane but are still trending lower in the long term.

Continuing claims fell by -3,000 to hit 1.893 million and a new low dating back to December, 1973. The previous week's figure was revised higher by 8,000. The four week moving average of claims fell by -4,500 to hit 1.903 million and a new low dating back to January, 1974.

The total number of Americans receiving unemployment benefits fell -15,883 to 1.596 million. This is a new seasonal and long term low, consistent with ongoing improvement in unemployment and hiring. On a year over year basis this week's figure is down -8.5%.

Pending Home Sales came in unchanged from last month and, with last month's downward revision, at a low dating back to January, 2015. The index is now down -3.5% on a year over year basis and has been in decline for the past 6 months. Economists at the NAR say that supply/demand imbalances persist as new listings fail to keep up with sales. This problem is likely to persist, especially in urbanized areas, as land shortages stifle activity across the sector and pent up demand continues to eat up available inventory.

The Dollar Index

The Dollar Index got a big boost from the ECB this morning as the bank tones down its outlook and dashed any hopes of hawkishness the market may have had. The bank has decided to cut its bond purchases in half, starting January 2018, and effectively extending QE into the fourth quarter of next year. Along with this they've amended their inflation outlook, expecting the 2% target to be hit in the second half of next year, and announced that current low rates would remain in place for a long time to come. The index gained nearly 1.5%, creating a long green candle and breaking above the $94 dollar resistance level. This move is likely to continue now that ECB and FOMC policy are no longer paralleling each other. The next big mover could be tomorrow with GDP but likely next week with the BOJ/FOMC meetings.

The Gold Index

Gold prices fell under the weight of a stronger dollar, shedding close to -0.80% by late afternoon. The metal is moving down from the now broken $1,275 near term support target and heading lower. Next target is near $1,263 and may be reached in the next trading day particularly if US GDP is on track or stronger than expected. A break below $1,263 would be bearish with next target at $1,250.

The Gold Miners ETF GDX fell -2% on the fall in gold prices as they equate directly to forward earnings potential. The ETF created a long red candle moving down from my near term support target and coming to rest at the top of the down trending resistance line near $22.37. The ETF is moving lower within a long term trading range and supported by the indicators. Both MACD and stochastic are bearish and showing a little strength so I would expect to see lower prices in the near term. Support may be found along the down trend line but, if broken, firmer targets exist near the bottom of the range at $21.

The Oil Index

Oil prices wobbled a bit in today's action but steadied in the later part of the day and managed to move up and set a 6 month high. WTI settled up $0.46 at $52.64 on tightening markets and hopes OPEC will extend its cuts. The cartel has pledged to do so, we'll find out for sure in a few weeks. Until then upside momentum may prevail with targets near $55.

The Oil Index held steady despite gains in the underlying commodity. The index created a small red bodied candle to the side of yesterday's candle and sitting on near term support target just above 1,200. The index has been in consolidation for about a month now and setting up for what could be another move higher. Price action such as what we've seen over the past month is healthy within uptrend and forming a significant congestion band. It allows the indicators to cool off as they have, setting them up for trend following crossovers. The indicators are still bearish and pointing lower so a further test of support is possible, the flipside is that both are also low in their range and set up to fire trend following signals should a bounce from support develop. A catalyst for such a bounce may be a move higher in oil prices, positive earnings/outlook from the energy sector or both.

In The News, Story Stocks and Earnings

Twitter released earnings this morning and sent the market a good message despite admitting it had been miscalculating monthly average users for many, many quarters. The company reports that revenue is down more than -4% over last year, beating estimates by about a half percent. The results come on improvement in non-GAAP income, EBIDTA, average monthly users and average daily users. Forward outlook is also good, better anyway, with earnings projected at the high end of the previously stated range. Shares of the stock jumped more than 18% to trade near the top of its long term range.

Today was the peak of peak earnings season, the busiest day of the season, with hundreds of companies reporting and many of them market moving. The ones topping the list include MSFT, INTC, GOOG and AMZN which all beat top and bottom line expectations. By beat I mean that revenue and earnings for all were well above estimates, supported by strong demand and accompanied by positive outlook. Even Amazon beat on earnings. EPS of $0.52 was nearly $0.50 ahead of estimates. Google's EPS of $9.57 blew away consensus of $8.34. Intel beat by more than 20% while Microsoft topped forecast by 16.6%. Shares of all rose in after hours action, led by Amazon's +7%. If after hours enthusiasm holds through until tomorrow the XLK Technology SPDR will likely move up to test or set a new all time high on this news.

The Wall Street Journal reported CVS was in talks to possibly buy Aetna, a deal that would combine insurance and pharma services under one umbrella. According to the report the deal could be worth $200 or more per share. The news caused CVS to drop about -3% but drove shares of Aetna up more than 10% but leaves about 10% on the table should the deal go through as reported.

The Indices

Today's action was tepid at best but to the upside and above near term support to say the least. Markets were led by the Dow Jones Transportation Average although I suspect the NASDAQ may be lead tomorrow. The transports rose nearly 1.5% intraday to close with a gain near 1% and create a medium sized green candle. This candle is in rebound to yesterday's sell off and moving up from support at the short term moving average. The indicators are mixed but consistent with a test of support within up trend. Stochastic is already firing a strong trend following crossover, MACD has yet to confirm but not far behind. A move up would be bullish with target at the all time high, a move lower bearish with target at the long term moving average near 9,400.

The Dow Jones Industrial Average closed with the 2nd largest gain, near 0.30%. The blue chips created a small bodied green candle just below the all time high and to the side of yesterday's candle. The past three candles are beginning to look like a small flag pattern within the prevailing up trend and could lead to further upside. The indicators are a bit mixed in the near term but bullish and convergent with the all time highs in the short to long. MACD in particular is convergent and bullish, ticking higher with today's data. Stochastic is high in the upper range and showing a bearish crossover but this could as easily precede a trend following signal as a decline. A fall from this level could dip below 23,000, a move higher would be trend following with targets in new all time high territory.

The S&P 500 closed with a gain near 0.10% and created a small spinning top candle to the side of yesterday's candle. The move is a sign of uncertainty, should I sell or should I not, that may persist into the near term. The indicators are not looking good and pointing lower following bearish crossovers, indicative of lower prices. Near term support is at the short term moving average and may be reached in the next few days if earnings fail to inspire support. A break below the moving average would be bearish with downside targets at 2,500 and below.

The NASDAQ Composite closed with a small loss, -0.10%, and created a small red bodied candle. The candle is sitting on support at the short term moving average and may move lower to test that support again. The indicators are both moving lower and suggestive of lower prices but not a guarantee. A break of support would be bearish with targets near 6,400, a bounce would be bullish with targets near the all time high and into new all time high territory. Based on earnings after the bell I imagine we'll see it bounce.

The markets were mixed today. Action was light, weak, tepid, lackluster and without real direction. This is most likely because of the earnings deluge released after the bell. Based on the ones I've seen I do expect to see the market move higher tomorrow. To say the tech sector beat on expectations is an understatement. The sector, for the most part, has beat on all fronts and across all metrics, and with positive forward outlook. There may be volatility and there will likely be some rotation but with earnings looking the way they are I just don't see reason for correction. I am bullish, if there should be another pull back or dip in prices I will be a buyer.

Until then, remember the trend!

Thomas Hughes

New Plays

Friday Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

After a heavy week of big cap earnings, Friday could see a fading of enthusiasm. The four big tech stocks beat earnings after the bell but futures are negative. With the gains in Google and Amazon alone you would have expected the futures to be strongly positive and a blowout open for the Nasdaq on Friday. That may still happen but Dow, Nasdaq, S&P and Russell 2000 futures are all negative in the overnight session. When we couple that with weekend event risk there is no reason to put additional money into the market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

New Resistance

by Jim Brown

Click here to email Jim Brown

Editors Note:

Prior support at 1,500 has definitely turned into resistance on the Russell 2000. The intraday high today was 1,501 and it lasted only a couple minutes. This level could be trouble if we sese a decline on Friday that takes us out of proximity reach. The close at 1,497 is still near enough that a positive headline could catapult the Russell back into the consolidation range but any further decline sets up some additional selling as investors lose their enthusiasm.

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

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BULLISH Play Updates

BOTZ - Global X Robotics AI - Company Profile


No specific news. Shares of BOTZ fell 50 cents for the biggest one day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

CONN - Conn's Inc - Company Profile


No specific news. Minor profit taking in a weak market.

Original Trade Description: Sept 23rd

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores provide furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; and home office products consisting of computers, 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. The company also provides short- and medium-term financing to its retail customers, as well as offers product support services, such as product repair services, repair service agreements, and various credit insurance products. As of January 31, 2017, it operated 113 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Conn's, Inc. was founded in 1890 and is based in The Woodlands, Texas. Company description from FinViz.com.

Conn's reported earnings of 26 cents and analysts were expecting a loss of 2 cents. Revenue of $366.6 million missed estimates for $371.9 million. They are located outside of Houston and were forced to close 23 stores, distribution and service centers in Beaumont and Houston. They lost 100 selling days as a result of the storm.

The company said collections from customer financings would be impacted and sales were slow after the stores reopened. However, once utilities and transportation systems were restored, the business saw a large uptick in activity. People who were flooded out have to replace all of their furniture and electronics. Because the company is located in and has a heavy presence in Houston, they will benefit from the surge in replacing household items for months into the future. Shares are rebounding on this outlook.

Earnings Dec 7th.

I profiled this as a long position on Sept 28th but the stock gapped higher on the 29th on an analyst upgraded and that cancelled the entry. Oppenheimer raised their rating to an outperform with a $56 price target. He said investors were under appreciating the resurgence of the Conn's business model and credit portfolio. The crisis of confidence from September 2016 has long passed.

Late Monday an SEC Form 4 was filed showing Harriet Stevens, a 10% owner, purchased another 42,000 shares for $1,066,800 on Oct 13th. This is a strong vote of confidence in the stock. She already owns 5.984 million shares worth $152 million. She did not need to buy more unless she really felt the stock was going higher.

Update 10/18: KeyBanc reiterated and overweight rating and raised their price target from $24 to $42. Shares spiked to $28.35 on a short squeeze related to the upgraded but faded back to $26.85 at the close. That was still a 5.5% gain.

Update 10/23: The company issued an operational update after the bell. They see the impact from the hurricanes as limited. Same store sales were impacted because of 100 lost selling days and reduced traffic associated with Harvey. However, starting in mid September they saw increased traffic and sales as consumers began to rebuild and replace everything they lost in the flood. October same store sales are up 15%. There were both positive and negative factors in the update and shares did not move in afterhours because the update was not released until 5:24 PM after the session closed.

I am recommending we close the long call position. It is a November call and any decline from the operational update would see the premium evaporate quickly.

Update 10/24/17: Yesterday after the bell CONN provided an operational update that contained some mixed details. October same store sales in hurricane areas was up 15% but nationwide sales were down -7%. I was worried about how this would play in today's market and recommended we close the November option position at the open because a drop in CONN shares could have negatively impacted that short-term option.

Hindsight is always 20:20 and CONN shares exploded higher with a $4.45 gain. We exited the option for a double so we cannot complain but the high for the day was double that. Fortunately, we kept the stock position and were richly rewarded.

Position 10/17/17:

Long CONN shares @ $26.00, see portfolio graphic for stop loss.
Closed 10/24: Long Nov $28 call @ $1.06. Exit $2.00, +.94 gain.

FINL - Finish Line - Company Profile


No specific news. Shares posted a minor decline in a weak.

Original Trade Description: October 21st

The Finish Line, Inc., together with its subsidiaries, operates as a retailer of athletic shoes, apparel, and accessories for men, women, and kids in the United States. The company offers athletic shoes, as well as an assortment of apparel and accessories of Nike, Brand Jordan, adidas, Under Armour, Puma, and other brands. It 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. As of April 2, 2017, the company operated 573 Finish Line stores in 44 states in the United States and Puerto Rico. It also operates e-commerce site, finishline.com and mobile commerce site, m.finishline.com. The company was founded in 1976 and is based in Indianapolis, Indiana. Company description from FinViz.com.

This is a simple scenario. UK retailer Sports Direct has acquired an 8% interest in Finish Line as it tries to expand its presence in the USA. Sports Direct was acquiring additional shares through third parties in order to force an acquisition. In late August, Finish Line adopted a poison pill to prevent a forced takeover. Since that pill was enacted, the companies have been in discussions and insiders claim the deal is moving along nicely towards completion.

Wells Fargo said there was at least a 50% probability the deal would happen and they are targeting a sale in the $14 - $16 range. Shares are currently trading at $10.50 and EBITDA of 4.5. Wells Fargo said that would be the cheapest takeout in years. Staples was bought by Sycamore for 5.5 times in September. Since Staples had not posted positive comps in 10 years they believe Finish Line will be sold for more than the Staples rate.

Shares jumped on Friday after the company declared an 11-cent dividend.

I am recommending as own this stock ahead of earnings on Dec 22nd. If there is going to be a deal announced it should happen on or before earnings.

Position 10/23/17:

Long FINL shares @ $10.49, see portfolio graphic for stop loss.
Alternate position: Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.

MRVL - Marvel Technology - Company Profile


No specific news. Shares cannot seem to close over that $18.60 resistance. When a breakout comes it could be strong.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.

ON - ON Semiconductor - Company Profile


ON announced a new 1/2.7-inch 2.3 Megapixel (Mp) CMOS digital image sensor with an active-pixel array of 1936H x 1188V. The AR0239 produces extraordinarily clear and sharp digital images in challenging bright and low light conditions. This, along with its ability to capture continuous video and single frames, makes it an ideal choice for many applications, including security and surveillance systems, body cameras and vehicle DVRs (dash cameras).

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Update 10/12/17: ON announced to new System on a Chip (SOC) 1.0 Megapixel CMOS image sensing products for the automotive imaging sector. The company said annual shipments of cameras for use in cars will easily surpass 80 million units by 2020.

Update 10/25/17: ON announced a CMOS image sensor platform that brings new levels of performance and image quality to automotive applications such as ADAS, mirror replacement, rear and surround view systems, and autonomous driving. The Hayabusa platform features a ground-breaking 3.0-micron backside illuminated pixel design that delivers a charge capacity of 100,000 electrons, the highest in the industry, with other key automotive features such as simultaneous on-chip high dynamic range (HDR) with LED flicker mitigation (LFM), plus real-time functional safety and automotive grade qualification. Shares declined only 15 cents in a weak market.

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.

TTS - Tile Shop Holdings - Company Profile


No specific news. Decent gain in a weak market.

Original Trade Description: October 23rd

The Tile Shop is a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company offers a wide selection of high quality products, exclusive designs, knowledgeable staff and exceptional customer service, in an extensive showroom environment with up to 50 full-room tiled displays which are enhanced by the complimentary Design Studio – a collaborative platform to create customized 3D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 134 stores in 31 states and the District of Columbia, with an average size of 20,500 square feet and sells products online.

The Tile Shop reported earnings of 5 cents and revenue of $84.4 million. Analysts were expecting 4 cents and $84.1 million. It was a minor beat but the company had warned on revenues back in early October and analysts reduced their forecasts.

Shares have been severely beaten up since July with a drop from $20 to $8. The company blamed the highly promotional environment and customers shopping for "entry level" products. The company has rectified this deficiency by adding some cheaper products and said they were adjusting their advertising and promotions to meet demand.

Shares have been flat all month but ticked up slightly on Friday and then accelerated on Monday. After a month of consolidation, it may have formed a bottom.

Earnings January 16th.

I am using February options to provide some earnings expectations in the premium. The December options are cheaper but will decay faster.

Position 10/24/17:

Long TTS shares @ $9.65, see portfolio graphic for stop loss.
Alternate position: Long Feb $10 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. New 8-yr low close on Wednesday.

Original Trade Description: October 14th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

It is a tough world when nearly every one of your products is listed on Amazon along with a dozen competitive products with free 2-day delivery. Bed, Bath and Beyond is stuck in that rut and it is painful.

In their recent earnings they reported 67 cents, down from $1.11 in the year ago quarter and missed estimates for 93 cents. Revenue of $2.9 billion also missed estimates for $3 billion. Same store sales declined -1.7%. The retailer said it was undertaking a number of "transformational initiatives." One of those initiatives was the termination of 880 manager positions. Shares fell 18% on the earnings.

With Toys-R-Us filing bankruptcy, there are now concerns about other stores possibly following suit. BBBY is in trouble even though they are buying back shares and paying a dividend. With sales and earnings declining those shareholder friendly efforts may have to be curtailed. They have 65,000 employees and 1,550 stores.

This is simply a case of a large brick and mortar retailer trying to compete with an all powerful Amazon and we know who is going to win this battle in the long run.

Expected earnings Dec 19th.

I am reaching out to January on the option because we can buy an extra 40 days of time for 21 cents. We can buy time but we do not have to use it.

Position 10/16/17:

Short BBBY shares @ $21.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $20 put @ $1.10, see portfolio graphic for stop loss.

HAWK - Blackhawk Network Hldgs - Company Profile


No specific news. The string of 3 declines ended with a low excitement rebound of 50 cents.

Original Trade Description: October 18th.

Blackhawk Network Holdings, Inc. provides a range of prepaid gift, telecom, and debit cards in physical and electronic forms; and related prepaid products and payment services in the United States and internationally. It operates through three segments: U.S. Retail, International, and Incentives & Rewards. The company distributes closed loop gift cards in the areas of digital media and e-commerce, dining, electronics, entertainment, fashion, transportation, home improvement, and travel; non-reloadable open loop gift cards; and prepaid wireless or cellular cards that are used to load airtime onto the prepaid handsets, as well as sells handsets. It also offers general purpose reloadable (GPR) cards; and Reloadit, a GPR reload network product that allows consumers to reload funds onto their previously purchased third-party GPR cards. In addition, the company provides incentives solutions comprising solutions, which allow businesses to manage consumer incentive programs, including in-store, online, or mail-in rebate processing; a hosted software platform for managing sales person and sales channel incentive programs; bulk prepaid card ordering systems and Websites to allow business and incentive program clients to use prepaid cards as part of their incentive and reward programs; and direct-to-participant fulfillment services for prepaid cards, checks, and merchandise. Further, it offers Cardpool that provides an online marketplace and various retail locations to sell unused gift cards; digital services for online and mobile applications; and card production and processing services to its prepaid gift and telecom content providers. The company distributes its products through grocery, convenience, specialty, and online retailers. Company description from FinViz.com.

Blackhawk is in trouble. The company reported Q3 earnings of 18 cents that beat estimates for 10 cents but revenue of $208.1 million missed estimates for $216.5 million. The company guided for the full year for earnings of $1.56-$1.70 and analysts were expecting $1.68. They cut revenue guidance to $940-$981 million and analysts were expecting $1.1 billion.

The CEO said, "We have recently seen increasing competitive pressures in some retail markets and believe this will result in lower growth in our U.S. retail physical channels going forward."

PayPal, Visa and MasterCard are making a big push into prepaid cards. Blackhawk is fighting the three giants in the market and apparently, they are losing market share.

Shares fell $10 on the earnings and have continued to bleed points in the days that followed. They are at a 52-week low and are approaching a 3-year low at $30. Investors tend to flee when companies warn of increased competition and falling market share. If the $30 level breaks, the next support is around $23.

Earnings January 10th.

Because the stock is over $30 this will be an option only position.

Position 10/19/17:

Long Dec $30 put @ .50, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term ETF position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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