Option Investor

Daily Newsletter, Tuesday, 10/31/2017

Table of Contents

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

Market Wrap

Calm before the Storm

by Jim Brown

Click here to email Jim Brown

The flurry of headlines over the next two days is likely to produce new market volatility.

Market Statistics

Wednesday alone had a week's worth of headlines packed into a single day. The minor market gains on Tuesday continued the established trend of a positive market the day before a Fed announcement. Nobody knows what causes it but it has been tracked and studied for the last decade. What happens after the announcement is a different story and normally the initial direction is wrong.

Tuesday's gains were lackluster with the S&P adding only 2 points and trading in a narrow 6-point range.

The economic news on Tuesday was about as lackluster as the market. The consumer confidence for October rose 5.4 points from 120.6 to 125.9. That was the highest level since 2000. The present conditions component rose from 146.9 to 151.1 and the highest level since July 2001. The expectations component rose from 103.0 to 109.1 and the highest level since March. Those who felt jobs were plentiful rose from 32.7% to 36.3%. Prospective homebuyers declined from 7.4% of respondents to 6.0%. Prospective appliance buyers declined from 53.8% to 48.9%. Auto buyers rose from 12.1% to 13.1% and probably related to the hurricanes.

The August Case Shiller Home Price Index rose slightly to 5.9%, up 0.1% from July. This is a lagging number and was ignored.

The Employment Cost Index for Q3 rose +0.7% after a +0.5% rise in Q2. Benefit costs rose +0.8%. This report was also ignored.

After the bell, the weekly API crude inventory report showed a huge decline of 5.087 million barrels compared to expectations for a 1.4 million barrel decline. Gasoline inventories fell 7.697 million barrels compared to expectations for a drop of 1.7 million barrels. Distillate inventories declined -3.106 million barrels. The decline in refined products is due to the seasonal switchover from summer blend fuels to winter blends and not a function of surging demand. Refiners are not replacing the summer blends in the storage facilities until the inventory levels decline to make room for the winter products. Refiners are also in a maintenance cycle to prepare for that production change.

WTI prices rose another 25 cents after the API data. That put prices just slightly over resistance from early 2017. The real move will come if the EIA report on Wednesday morning shows similar declines.

The calendar for Wednesday begins with the ADP employment numbers for October. The estimates have declined 25,000 to a gain of 200,000 over just the last two days. The Nonfarm payrolls on Friday have seen estimates rise 5,000 to 315,000 over the same period. As long as we get numbers in those ranges, the Fed is not likely to accelerate their rate hikes. Anything hotter than that and the Fed could become uneasy.

The ISM Manufacturing Index is expected to decline slightly from 60.8 to 60.5. That number could be completely ignored but any significant deviation could raise some concerns. There could be some hurricane impact that depresses the October activity levels.

The FOMC announcement is not expected to raise any eyebrows as long as they do not surprise us with a rate hike. That would truly be a lightning strike and nobody expects any movement.

The real challenge is going to be the release of the details on the tax reform package. The rumors are flying and there could be something in the package for both the bulls and the bears. Negative details could cause a major hiccup in the market. Analysts fear the need to get something passed will have necessitated the inclusion of features in hopes of appeasing both fiscal conservatives and a few democrats as well. This will be a witch's brew of good, bad and ugly components. Since all the good expectations are already priced into the market, the odds of a sell the news event are very high.

Late news tonight: The GOP is going to postpone the release of the proposal until Thursday.

Also on Thursday, President Trump is expected to nominate Jerome (Jay) Powell to take over as Fed Chairman when Janet Yellen's term ends in January. Anyone else but Powell is likely to tank the market. The other names in contention are seen to be more hawkish and favor less policy accommodation.

The rest of the week will be tame by comparison to Wed/Thr with Thursday night earnings the big focus after the dual Fed headlines.

The headline earnings for Wednesday will be Facebook, Qualcomm and Tesla. All will come after the bell. On Thursday, Dow components Apple and DowDuPont will report along with Alibaba and Starbucks.

The early morning earnings disaster was Under Armour (UA). Actual earnings of 22 cents beat the street by 3 cents but fell -24% from the year ago quarter. However, revenue fell -5% to $1.41 billion and missed estimates for $1.49 billion. This was the first quarterly revenue has decline ever. The company guided for full year earnings of 18-20 cents. Think about that a minute. They posted 22 cents in Q3 but they are guiding for 18-20 cents for the year. That was the second time they have lowered guidance in three months and about half the 37-40 cents they were expecting in August. They cut full year revenue growth forecasts from 9-11% to "low single-digits." North American revenue fell -12% and Under Armour gets 90% of its earnings from North America. UA shares fell 22% on the news.

While UA and Nike are struggling, Adidas saw North American revenue rise 24% in 2016 and 32% in the first six months of 2017.

Pfizer (PFE) reported earnings of 67 cents that beat estimates by 2 cents. Revenue rose 1% to $13.17 billion and matched estimates. The company is trying to decide if it wants to sell off its consumer product business consisting of brands like Chapstick, Centrum vitamins, Advil and dozens of other brands. A decade ago, they sold off profitable brands including Listerine, Visine, Sudafed and Neosporin to J&J for $16.6 billion in order to invest in their new drug pipeline.

Pfizer's drugs still under patent saw an 11% rise in sales to $8.12 billion. Older drugs with generic competition declined 12% to $5.05 billion. Consumer health sales rose 4% to $829 million. The company guided for the full year for earnings of $2.58-$2.62 and slightly better than the $2.54-$2.60 forecast in August. They guided for revenue of $52.4-$53.1 billion, down from the $52-$54 billion in the prior guidance.

Aetna (AET) reported earnings of $2.45 compared to estimates for $2.06. That was up from $1.70 in the year ago quarter. Revenue of $14.95 billion missed estimates for $15.11 billion. The company guided for full year earnings of $9.75, up from prior guidance of $9.45-$9.55. Analysts were expecting $9.55. Aetna has fully exited the Obamacare market where it previously had over 900,000 people insured. The sign up window opens this week but Aetna is not participating in 2018.

Allison Transmission (ALSN) reported blowout earnings of 75 cents that beat estimates for 48 cents. Revenue of $595 million beat estimates for $526 million. The beat was powered by higher demand from North American off-highway products and higher parts sales. Shares spiked $3 at the open but gave it all back.

MasterCard (MA) reported earnings of $1.34, up 11%, that beat estimates for $1.23. Revenue of $3.4 billion rose 21% and beat estimates for $3.29 billion. MasterCard's gross transaction volume rose 11% to $1.35 trillion.

Shopify (SHOP) reported earnings of 5 cents that beat estimates for 2 cents. Revenue rose from $99.6 million to $171.5 million and beat estimates for $166.0 million. They guided for Q4 revenue of $205-$208 million with full year revenue of $656-$658 million. Analysts were expecting $204.3 million and $650.4 million. Shares fell $10 after a post by short seller Citron Research about their marketing tactics.

Alibaba (BABA) shares are up $17 in four days as traders position themselves for the November 11th singles day. However, this year Alibaba is calling it the 11.11 Global Shopping Festival and instead of 24 hours, they have lengthened it to 24 days. This is going to produce monster revenue with new sale items and promotions being presented on each of the 24 days by more than 100,000 vendors. Alibaba earnings are before the open on Thursday.

Mylan's (MYL) president was named in a major suit brought by 46 state attorneys general against 18 drug makers. The prosecutors are calling it a "mind-blowing" scheme to fix generic drug prices. Reportedly, manufacturers met at trade shows, conferences and other events as well as through email, phone and text messages. Together the 18 companies worked together to falsely inflate generic drug prices. The prosecutor said the "collusion was so pervasive that is virtually eliminated competition in the market for 15 drugs" to treat glaucoma, arthritis, high blood pressure, diabetes, anxiety, asthma and several other conditions. The suit also includes TEVA, RDY, NVS, LCI, Actavis Pharma, Emcure Pharma and Heritage Pharma among others. Since the generic drug market is a $75 billion a year market, one prosecutor said they could see a fine of $5 billion a year and the records go back 10 years or more.

Apple shares are screaming higher after the orders for the iPhone X opened on Friday. Shares have rallied $12 in three days. Apple provided sample phones to the various writers that review tech gadgets and every one of them had glowing reviews. They said the X is not perfect but it was the greatest iPhone ever made. "It was as revolutionary as the original iPhone." The rumors of slow production continue to be dispelled to some extent but we will get more information when Apple reports earnings after the close on Thursday. We say this all the time but "the guidance will be critical." Beware a sell the earnings news event!

Apple is only $127 billion away from having a trillion dollar market cap.

Qualcomm (QCOM) shares fell sharply after a report that Apple could replace the QCOM chips in their phones and iPads as early as the Q3 product update in 2018. The companies are in a multibillion-dollar battle over patent licensing and both companies have suits in progress all around the world. Intel would be the beneficiary. Intel already supplies more than half of the modem chips in the iPhones as Apple tries to move away from Qualcomm. A couple years ago, Samsung dropped Qualcomm chips and did not tell the company until it was almost time to ship the phones. Shares fell 7% on the news.

Netflix (NFLX) shares declined on news they have halted production on season 6 of House of Cards (HoC) because of the sexual allegations against Kevin Spacey. The company had already said it was going to drop the show after season 6 but the new season was eagerly awaited and production had already begun. Actor Anthony Rapp said Spacey picked him up, placed him on a bed and climbed on top of him while making sexual advances, while he was a minor in 1986. Spacey was 26 at the time and Rapp was 14. The claim by Rapp caused a confession by Spacey that he did not remember it because he was drunk at the time and if it happened, he apologized for the event. That did not appease the public and there is a huge outcry against him. He also took the apology opportunity to admit that he was gay. Netflix said production will be suspended until further notice. Since HoC is one of their top original programs, they will be pressured to complete it but also pressured to drop Spacey. Shares were down $3 intraday.

Your rally today was brought to you by the letters S-O-X. The semiconductor sector was on fire led by a $2.66 gain in Micron after Samsung reported strong demand and short supply of DRAM and NAND memory would continue through 2018. Nvidia gained $3 and closed at a new high at $206.75. Intel also surged to a new high at $45.49 with a $1.12 gain. The semiconductor sector leads the Nasdaq. Where chips go, the Nasdaq will follow. Past Option Investor writer Jeff Bailey called the $SOX the "head of the snake" because the Nasdaq had to follow wherever it went.


Also dragging the markets lower on Tuesday was another decline in the Dow Transports. This is seen as a sentiment indicator for the Dow Industrials and it closed at a four week low. The airlines have been declining and now the railroads are declining as well. If the economy is so strong, why are these subsectors in decline? Enquiring minds want to know.

Robert Shiller has been making the rounds on TV recently because the CAPE Ratio (Cyclically Adjusted PE Ratio) has risen to 31.42 and the same level it was when Alan Greenspan gave his famous irrational exuberance speech in December 1996. Today is the second highest market valuation ever. However, that big spike on the right of the chart came after the Greenspan speech. Overbought can always become more overbought and that is eventually followed by the sharp declines into oversold as seen on the chart. The key is being aware that markets do not go up forever and be prepared to exit when the slide begins.

The S&P is moving up on the strength in the tech stocks. The A/D ratio on the S&P was 233:223 with advancers only ahead of decliners by 10 stocks. However, that was much worse than the broader market at 4,586 advancers to 2,595 decliners. There was some buying under the surface that kept the markets positive.

The S&P has resistance at 2,580 and support remains 2,555-2,565.

The Dow barely closed positive once again with the index declining sharply a few minutes before the close. In the last 20 min of trading, the Dow dropped 46 points but recovered 15 points in the last four minutes to end with a gain of 28. Apple was the leader again and it has contributed nearly 85 Dow points in just the last three days. Without Apple's rebound, we would be looking at a lower level on the Dow today.

Note that the A/D on the Dow was evenly mixed at 15 winners and losers. The majority of the components only posted fractional gains. This is either due to worries over the Fed meeting and the tax plan on Wednesday (now on Thursday) or the post earnings depression phase has already started.

Resistance is 23,470 and initial support is 23,250.

The Nasdaq managed to move over resistance at 6,700 and close at a new high thanks to the chip sector and Apple. Given the 144-point spike on Friday and the gains today, the Nasdaq is already moving into overbought territory but at least it had a week off to rest the prior week. This could give the tech sector some more running room as long as the Dow does not implode. Having AAPL, MSFT and INTC in the Dow is providing tech support.

Support is now well back at 6,550.

The Russell rebounded thanks to the chip stocks and closed back over the prior support at 1,500 but it now has a confirmed pattern of lower highs. The Russell needs to break out over 1,512 on volume to convert the sellers back into buyers and begin a new leg higher. This week and next are small cap earnings weeks.

With the rescheduling of the tax plan release for Thursday, I would have expected the market to fade or continue to trade sideways until the event. However, once the date change was confirmed the S&P futures began to rise and are now up +3.75.

Keep some cash in your account in case we do get a buying opportunity because it will eventually appear. I am not talking about a crash or correction but just a 3-5 day bout of profit taking. Follow the Boy Scout motto and "be prepared."

Enter passively, exit aggressively!

Jim Brown

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New Plays

Postponed Event

by Jim Brown

Click here to email Jim Brown
Editor's Note

The release of the details on the tax proposal has been postponed until Thursday. The next two days are very busy with high-risk headlines ahead. I am afraid of the tax proposal. There could be negative details the market will not like. The postponement from Wednesday to Thursday means they are still fighting over what to put in it. If any of the details leak it could be market negative since all the positive headlines are already priced into the market.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Chip Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index rebounded 12 points thanks to the semiconductor sector. The banks, transportation and biotech sectors were negative but the semiconductors were on fire with nearly a 1% gain thanks to Micron and demand news from Samsung earnings. The Russell barely closed over 1,500 after trading almost to 1,507 intraday. There is a solid pattern of lower highs that could become a problem as the pace of earnings slows.

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

ARNC - Arconic
The long position was entered at the open.

FINL - Finish Line
The long stock position was stopped at $9.50.

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

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

ARNC - Arconic - Company Profile


No specific news. Shares gained slightly to a post earnings high close.

Original Trade Description: October 28th

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company description from Arconic.

Arconic is the old Alcoa. The aluminum mining company was split off as Alcoa Corp and the original Alcoa was renamed Arconic. This company manufactures parts and complicated assemblies from aluminum. They take the raw aluminum and add value to it by creating high tech, high value parts like turbine blades for engines and gas turbines. They are moving into 3D printing of aluminum parts. They have dozens of remote offices close to large industrial clusters where they can provide immediate service to large manufacturing companies.

Shares fell after earnings because they announced the appointment of a new CEO with their earnings report. Charles Blankenship will replace David Hess on January 15th.

The company reported earnings of 25 cents that missed estimates for 27 cents. Revenue of $3.24 billion beat estimates for $3.09 billion. The company guided for the full year for revenue of $12.6-$12.8 billion, up from prior guidane of $12.3-$12.7 billion. Full year earnings are now expected to be $1.15-$1.20 per share.

Expected earnings January 22nd.

Shares fell $3 on the earnings miss and CEO change. After bottoming at $24, they are trying to move higher with resistance at $25.15. I believe ARNC will return to pre earnings levels at $28.

Position 10/31/17:

Long ARNC shares @ $24.76, see portfolio graphic for stop loss.
Alternate position: Long Jan $26 call @ 95 cents, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


No specific news. Nice gain as it recovers from the Thursday drop.

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.

Update 10/26: 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.

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.

FINL - Finish Line - Company Profile


No specific news. Shares fell sharply on the Under Armour revenue drop and weak guidance. We were stopped out of the stock position and the option will move to the Lottery Play section this weekend.

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:

Closed 10/31: Long FINL shares @ $10.49, exit $9.50, -.99 loss.
Alternate position: Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.

ON - ON Semiconductor - Company Profile


No specific news. Another new record high close.

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.

Update 10/26/17: 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).

Position 10/10/17:

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

SVU - Supervalu - Company Profile


No specific news. Closed at a 2-week high.

Original Trade Description: October 28th

SUPERVALU INC., together with its subsidiaries, operates as a grocery wholesaler and retailer in the United States. The company operates through two segments, Wholesale and Retail. The Wholesale segment engages in the wholesale distribution of various food and non-food products to independent retail customers, such as single and multiple grocery store operators, regional chains, and the military. This segment also provides various services, such as retail store support, advertising, couponing, e-commerce, network and data hosting solutions, and training and certification classes, as well as administrative back-office solutions. As of February 25, 2017, this segment operated approximately 1,902 stores with a network spanning 40 states. The Retail segment operates retail stores that provide groceries and various additional products, including general merchandise, home, health and beauty care, and pharmacy products. This segment operated 217 stores under the Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh, and Hornbacher's banners, as well as 2 Rainbow stores. The company's stores offer a range of branded and private-label products comprising perishable and nonperishable grocery products. SUPERVALU INC. was founded in 1871 and is headquartered in Eden Prairie, Minnesota. Company description from FinViz.com.

Supervalu has morphed into more of a wholesaler of groceries than a retailer. Given the movement by Amazon and Walmart into online groceries that may be the way to go.

For Q3 they reported adjusted earnings of 46 cents that beat estimates for 36 cents. Revenue of $3.8 billion narrowly beat estimates for $3.79 billion. Wholesale sales rose 63% from $1.7 billion to $2.7 billion while retail and corporate sales were flat. They announced the acquisition of Associated Grocers of Florida for $180 million. Associated had revenue of $650 million for the trailing 12 months. This is a major bolt on acquisition where they can add value and scale and increase their presence in Florida, the Caribbean, South America and Asia. In June they completed the acquisition of Unified Grocers, an active distributer on the West Coast for $390 million. Unified had revenue of $3.8 billion in 2016.

Shares of SVU have been declining since their high of $84 in April 2015. With these two acquisitions and the sale of the Sav-A-Lot division in 2016, the company is turning the business around. I like that they are reducing their exposure to retail and all the expenses and employee related hassles that go with running a retail grocery store. By focusing on the wholesale business they can reduce overhead and expand their reach and their profit margins.

Who knows, maybe Amazon will decide they need to buy a wholesale grocery distributor.

Earnings Jan 17th.

Position 10/30/17:

Long SVU shares @ $16.13, see portfolio graphic for stop loss.
Alternate position: Long Jan $18 call @ $1.05, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. New 8-year closing low.

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. Only a minor rebound.

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 slow moving 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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