Update on KITE Bear Alert and Others

KITE:
I had previously alerted that KITE was due for a fall.  Here's how that panned out:

On November 18, I published a post about turning bear on these markets.  I found a particularly frothy stock in a company called Kite Pharma (KITE).  You can read the details here.

So how did this call turn out?

Had I shorted this at $87.55 at the open on Thursday Nov 19, 2015 (Paper Trade), then I could buy to cover today at $44.98 for a profit of 51% or $42.57 per share (Net Profit $4,257 per Put Contract minus Premium).  The main problem was the over-valuation of the stock with no real sales and a looming possible rate hike from the Fed which did come to pass.

CMG:
On Twitter, I had warned in a tweet on Friday November 13 that Chipotle Mexican Grill (CMG), based on weekly candles, had fallen firmly into bear territory.  I doubted myself over the following days and weeks, but I did note that $470 was likely support and could go as low as $430.  I even pointed out some suspicious behaviors in the trading of that stock here, and here.  I don't know if any of that is part of the newly expanded criminal investigation, but I'll be waiting to see.

Here's what's happened since:

Until they resolve their issues, CMG is for me a toxic stock, and I plan to wait until I know more about what they're doing to prevent illness (beyond blanching onions or sending tomatoes and onions to a central location for chopping and processing).  I would HIGHLY recommend to the company to adopt the use of the Process Failure Modes and Effects Analysis (PFMEA) as a tool for evaluating rick in their process as a restaurant chain.  One cannot inspect quality into any product.  This is why we have "Process Control."  The PFMEA and a detailed Process Control Plan are used together to insure the quality of products in many industries including the manufacture of automobiles.  The Automotive Industry Action Group (AIAG) has training materials and classes for this.  I used to write  and update these things (they are living documents) for manufacturing processes on a daily basis when I was a manufacturing engineer some years ago.  I'd even be happy to help them learn how to use this tool assess risk and get ahead of future outbreaks.  Even NASA uses the FMEA.

Possible New Bear Alert (Watch):
UPS:

UPS is setting up as a POSSIBLE Evening Star formation.  This is a three-candle pattern and today is the third day.  Depending on how today goes, UPS could be in for a big drop.  They have significant debt both long term and near term, and the Fed seems to be happily marching on to auto-mechanical rate-hikes.  I expect that this is due to them seeing the data that we may be headed for a REAL recession and they desperately need to reload their toolbox before it REALLY hits.  With Amazon stating that they plan to have their own fleet of trucks, and new Brick & Mortar stores, will UPS get cut out of their own future?


"New" Alert:
S&P 500:

While I've tweeted about the major stock indices last summer and recently, I think I NEED to make this Bear Alert (although a little late).  The markets are overdue for a significant correction; we all know that.  If you haven't re-balanced your paper-portfolio (recall that this blog is about paper-trading), you should do that as soon as possible.  I told Jim Cramer in a tweet on September 1 that the Dow Jones could hit as low as $12,500 before this pullback is over.

This 25-year chart of the S&P 500 (SPX) using monthly candles shows a worrying pattern for bulls:

Looking at this chart, we can see that it's time for that full pull back.  There are 3 price-confluence zones illustrated:
1) $1,760 - $1,765
2) $1,450 - $1,462
3) $1,034 - $1,039

This makes cash look like an appealing position for the volatility-averse.

There are geopolitical concerns well discussed in the media (Saudi & Iranian oil surplus as well as US oil glut and now international selling of US oil, High Yield Debt in Oil, Russian aggression, Chinese markets slowing, Russian and Chinese state-sponsored data security breaches, North Korea detonating their "Q-Bomb" (sic - RE: The Mouse that Roared), European Debt in the banking industry, currency deflation around the World while the US Dollar strengthens perhaps too much, too quickly, ...   and the list goes on).

All this leads me to ask some questions (ESPECIALLY given the release of the movie "The Big Short" which I HIGHLY RECOMMEND seeing):

1) What ever happened to all that debt from 2008 that was crushing our economy?
2) In 2013 CDOs came back on the scene in banking; does anyone remember MORAL HAZARD?
3) If CDOs were the last way to launder risk, what NEW instruments have these financial engineers devised?
4) Have CDOs found their way to foreign shores?  If so, can they re-infect our markets?
5) With the emergence and popularity of ETFs and Inverse ETFs, is there something lurking?
6) Are World currencies headed toward a Global-Weimar-Republic?  Could DEFLATION actually be ... GOOD???

I'm going to have a string of posts over the coming weeks discussing what I'm finding about these questions and how this might impact your paper-trading.

Look for it.


Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.

My Retail Naughty & Nice Lists

Of late, I've had a very bearish view on the markets.  For the most part, I still do.  However, in the near term, I think the post-holiday earnings season will have some upside surprises as well as some well-deserved precipitous falls.  After reviewing some conference call transcripts, earnings reports, trends within those, and some personal observations, I think the wheat and the chaff will get distinctly separated in the next round.

Among retail, I think the following companies (by no means a complete list) will surprise to the upside in their next quarterly earnings reports (in no particular order):

Kohl's (KSS)
Macy's (M)
Target (TGT)
Walmart (WMT)
JC Penney (JCP)
Best Buy (BBY)

The following is my Naughty List.  These are companies late to the on-line migration game and poorly managed such that they are, in my opinion, in a free-fall.

Nordstrom (JWN)
Sears (SHLD)

I know there are lots of reports of Walmart and Target having lack-luster crowds, but the Target stores in West Michigan that I saw had full parking lots when I passed them.  Walmart seemed eerily quiet, but their online shopping site was so burdened with traffic that they had problems keeping it working properly.  That likely means that traffic merely shifted to on-line.  Given the history of Walmart on Black Fridays Past, I certainly understand the sentiment - great deals, but unruly crowds.  JC Penney is reporting better than average e-sales, and their stores in West Michigan appear plenty busy.  They's been turning their operations around for some time now and it's showing.  Even their on-line presence is easy to navigate and they offer the brands my family likes to buy.

I was actually shocked at how full the Macy's (M) parking lots were.  They were getting slammed at 10:00 Saturday morning, and Best Buy was almost equally busy.  Nordstrom Rack had an anemic showing at that same time with an all-but-baron parking lot.  The only parking lot more empty was our local Chipotle (CMG) who I don't think was open for business yet, but I typically find that Chipotle low on traffic (in all fairness - location is likely the issue there).  Nordstrom Rack near my home is typically a ghost town, and it seemed even lighter on "Small Business Saturday."  Ouch!

As for Nordstrom proper, nearly everything they offer is either cheaper elsewhere.  They didn't even discount the Fitbit (FIT) Surge that is $199.95 everywhere else on the net (WMT, TGT, KSS, AMZN, etc.).  It's full price ($249.95) at Nordstrom (JWN).  Their management says they've noticed a slowdown in sales and foresee a continuation in these trends.  As for what's working and what's not, they've, "got nothing to point to.  It's just foot traffic."  As to what led to the foot traffic slowdown, They admitted to not knowing why.

I have a few ideas.  They are bested by the likes of Macy's, JC Penney, L Brands, Hudson's Bay, and others.  For goodness sake, herroom.com is better equipped on line.  Listen to the Q&A session.

Sears has been on a downward slide for some time now.  A look at their online trend data compared to others, it's apparent that they're just not functioning toward an ongoing future.

While Kohl's is getting its footing in the e-commerce arena, they are VERY well managed.  I've noticed a general drop in foot-traffic over the years, but in looking at their financial data I can see that their management has done a great job at managing costs while still managing a competitive retail environment.

So those are my lists, naughty and nice.

Disclaimer:  I trade stocks and options so I may at any time have positions, long or short or equivalent, in any of the companies mentioned in this piece.

I've Had It With All The Bull. I'm Turning Bear!

That's it.  My identity crisis is over.  I'm officially a BEAR.  I've made higher gains in 2 weeks of trading PUT options than all the years I've had trying to buy and sell stocks as a Bull.  If you ask me, it's all a BUNCH OF BULL.  It's all hype.  It's all smoke and mirrors until you get a look under the hood and learn to see what's really going on.

Good companies will show themselves when we look at their books and bad ones will look odd.

SO, here's my BEAR ALERT for this week:

KITE

I'm not really of a mood to trust analyst ratings, especially when they all seem to be TOO in love with a company.

If you want to know more about what the company does, here's a link to their web site:
http://www.kitepharma.com/

It's an interesting thesis for sure, and I for one would hope and pray that there is real promise in what they say they are doing.  BUT I'm not in this for hope and prayer, I'm looking at a business and the trends in the business here disturb me.

If you look up KITE's information at your broker or on sites like Finviz (Images in this article are from FinViz), you will see that the price to sales ratio is over 487.  That means that the price of the stock is more than 487 times the the gross sales of the company.  The price to book ratio is 9.35.  Bristol Meyers' is only 7.06.  But WAIT!  It gets better.  The Price to FREE CASH FLOW ratio is 1077.75.  That means that you, the buyer of the stock at over $80/share are paying more that 1000 times the free cash flow of the company.

But the cash of the company is $8.98/share.  So, the free cash flow of the company is less than 1 cent per share.  They appear to have no debt, so at least they're not heavily leveraged.  But then when I started looking at the mechanics of the ownership of this company, I saw something rather odd:

If you look at the Annual Earnings of KITE in 2012, 2013, and 2014, you'll see that it goes from -0.48/share to -1.43/share to -1.91/share in 2014.  For a startup company developing a new product, this may seem normal and the acceleration may seem to be slowing, BUT there's another part to what's going on.

Recall that the earnings are being quoted on a PER SHARE basis.  That means that the total losses are really a function of the shares outstanding.  If that number were constant, there would be no problem, but unlike good companies like Disney (DIS), Schlumberger (SLB), or others who buy back their share and INCREASE value to the share holders, KITE has been increasing shares.

In 2012 they had 5.31 million shares outstanding with that -0.48/share loss.
In 2013 they had 5.47 million shares outstanding with the -1.43/ share loss.
In 2014 they had 22.82 million shares outstanding with their -1.91/share loss.
Currently, they stand at 43.73 million shares outstanding with authorization for 200 million shares.

So where are all these shares coming from?  I would normally figure that it's from the sale of stock to raise cash for operations until they get FDA approval for their product and/or service.  But something seems to have emerged this year and I think people are beginning to take notice.

If the prospects of this company are REALLY as good as the promoters of its stock would have you believe, then the directors and officers of the company would be buying as the opportunity presented itself.  They would even retain some of the shares they get in options as pert of their compensation packages.  However, looking at the insider transactions of KITE, I can see that it's quite the opposite.  The officers of this company have REDUCED their personal stakes in the company and at every turn, and it seems quite frequent, they are cashing in on options and dumping the shares on the market.  In fact, they have done NO buying at all except to execute AUTOMATIC SALES to the market.

Perhaps it's not as nefarious as I'm reading into it, but it looks to me that the officers and directors of KITE are lining their pockets with money from the people buying the stock from the market, and the money never goes into the books of the company, and the shareholder value is HEAVILY diluted.  Meanwhile, the stock is at ALL TIME HIGHS for it's price.

I may currently or at any time have or close a short or equivalent position in this or any other security, but for now, I see trouble ahead as people get wise to the shareholder dilution and the accelerating losses that are being masked in PER SHARE comparisons to analyst estimates when in fact it looks a little more like a shell game.

If one wants to look at this as being a time for a normal retracement, then let's look at the Fibonacci ratios:

I'd say this thing could EASILY hit $60 in the coming week to 2 weeks.

My rating for this company is SELL!  This company is bloated and frothy even if their technology will EVENTUALLY pan out.  For now, it's an expensive piece of BLUE SKY.

I'm not an accountant, and I'm not a financial professional, so you need to do your own due diligence, but these do not look to me like the books of a "best in breed" company.

Schlumberger - The NEW Belle of the Ball?

Jim Cramer is saying that Schlumberger (SLB) is de-risked.  It's hard to argue with that logic.  After all, SLB gave an abysmal earnings report, stated that supply is weakening as the dramatic cuts in E&P investments are STARTING to take effect., stated that revenue is dropping due to persistent pricing pressure, and on and on and on.  The company through all this managed to still turn a healthy profit and beat analyst estimates by one cent, but the revenue trend is not doing well (no pun intended).

The overall O&G market is plagued by a glut in supply, and an ever-decreasing capacity for storage.  This earnings season is showing an overall trend toward a slowing economy and that means FEWER truck on the roads, both here an abroad as international companies are getting hit harder.  Fewer trucks on the road means less demand for diesel.  Less demand for oil and a glut of supply spells trouble for oil producers.  The heavily leveraged companies like Sandridge (SD) or Magnum Hunter (MHR) are likely in deep trouble.

I even pointed out the long-term Head-and-Shoulders pattern I see in the 10-year chart.  Over the last 3 years SLB and other oil companies like Halliburton (HAL) have formed this same pattern:

The Head and Shoulders in the OIH was considerably more abbreviated in time:

This, I'm sure, has a lot to do with the many sectors and components to this index fund.  Natural gas, pipelines, tankers, producers, explorers, and others all make up this fund.  So it should be no surprise that this fund may very well be finding a bottom as industry focus shifts from one sub-sector to another.

With all this going for it (sic), SLB share price barely flinched and even seemed to rally on Monday after HAL reported similar dismal revenue numbers.    I have to wonder, though, how far those revenues can erode before dividends get reduced or altogether cut.

Yesterday at the close of trading, we learned that SLB has LEASED the exclusive rights to a fracking technology from Energy Recovery (ERII) for the next 15 years which sent ERII shares soaring over 100% in after-hours trading.  No doubt this is a short squeeze as the last reported Short interest in ERII was more than 3.5M shares, representing 35 days to cover at their A.D.V.

For SLB, this means that there is a near-term cash outflow over the next year of $125M JUST for the rights to use this technology.  SLB STILL has to actually invest in the execution of the technology and that will likely be far more than the licensing costs.  That plus the costs of the CAM merger, means that SLB's CEO was not kidding when he said that the next TWO YEARS were going to be rough.  SLB's CEO is taking a huge risk investing so much into fracking when natural gas is selling at its current prices.  I'm a little surprised that he isn't going after pipeline exposure as a glut of natural gas will not effect the pipeline revenues as much as it will for producers.  He might be better off making a play to buy up Magnum Hunter (MHR) as part of a restructuring of that company.

Anyway, with a forecast as ugly as SLB's I suppose it's just Wall Street logic that the prices should finally rebound.  I wouldn't my breath for a dividend after December, though; at least not for the next 2 years.

Schlumberger & Halliburton, A Double Tap to Oil & Gas?

     Tweets just don't give enough characters for an intelligent one-liner, let alone a detailed review of a topic like the 2015 Q3 earnings for Schlumberger (SLB) and Halliburton (HAL).  These are admittedly two well-run companies (no pun intended) in the Oil & Gas sector, but are suffering from the decline in commodity prices of the products they service.  Thursday, after market close, SLB posted financial numbers indicating that they beat by one cent per share on earnings, but missed on revenue.  This is definitely a testament to the quality of the management at SLB because they suffered greatly on revenue, but still managed to keep costs down to a level where they beat the estimates, if only by one cent per share, but ALSO managed to maintain a share buyback program as maximum allowable amounts, lowered long term debt, and negotiated an acquisition of another company to compliment their own corporate offerings long into the future (Cameron International - CAM).

    With all this going for SLB, what could possibly go wrong?  Well, for starters, in that same set of numbers, and confirmed by the phone conference Friday morning, SLB is lowering guidance well into the future.  They will have to, by law, stop their share buy-back until after the CAM shareholder vote; currently the next annual meeting is May 6 of 2016, so saying that the merger will be completed in Q1 of 2016 when the next scheduled vote is in Q2 of 2016 seems odd.  Clearly, there will need to be a hasty shareholder meeting put together if SLB's timeline is to be kept.

    Where SLB is concerned, their report and their history shows a progressive decline in revenue.  That sits at the heart of their problems right now.  HAL is due to report Monday morning, releasing numbers at 7:30 AM EDST and their conference call is at 8:30 AM EDST.  Analysts have already cut expectations for Oil & Gas companies based on the depressed prices for the commodity.  SLB managed to beat on earnings via a skilled use of cost control, but their revenues were a miss.  If HAL reports a similar miss on revenue and a similar dark outlook for O&G services then the entire sector will likely take a hit in the near term.  If HAL manages to beat on revenue then it will say a lot about SLB's report.  If SLB is reporting deteriorating revenue and HAL is improving or at least not deteriorating then we will likely know where SLB's revenue has gone...   From AMD to INTC.  

That's right, I'm saying it.  If HAL beats on revenues after the report and guidance we got from SLB on Friday then it likely means that SLB is losing market share.  Let me be clear in stating that I do not expect this, but we won't know HAL's numbers until they are published.  If HAL shows similar numbers both top and bottom line but has a more optimistic outlook, then it's probably just optimism.  Whether that optimism is well placed, only the passage of time and proven results, or the lack thereof, will be able to tell us.

From a chart perspective, I see HAL looking a bit bearish:

The Fibonacci retract in the downward direction seems to be consistent with a reversal from the long term bullish trend HAL has enjoyed for the last few years.  Further, there is the look of a possible Head and Shoulders pattern in that monthly chart.  The knowledge of a glut of oil and increasing reports of well shut downs and cutbacks, only further supports the notion of this being a bearish pattern worthy of careful consideration.  If you're long this stock, or any other on the O&G services sector, then I recommend either taking some profits or hedging with some Put options to cover your position.

When I look at the 10 year monthly chart for SLB:

I definitely see the Head and Shoulders pattern, but I also see that the retrace on the run-up from early 2009 has hit the 63% marker, and is currently a little over it.  If it breaks below this, then the H&S will be confirmed and SLB will likely see mid to low $50's before it's over.

If we look at the near term chart for CAM, the company being acquired by SLB we might get a feel for what is being anticipated by the share holders there.

    This seemingly bullish consolidation looks pretty good except for the hanging man candle from Friday.  High volume, but no movement and the price is at a peak.  This means that someone, or several, are selling at a pace that is overcoming the growth in price for this stock.  As a company, they seem well managed, feel free to review any of the analysts' reports on CAM, but to me, they look like a healthy company with a stock about to get a temporary knock-down.  The gap-up from the news of the buy-out will likely need to be covered in a retrace before this stock moves much higher.  I'd say wait for a better price to get in, or cover with Puts if you own it and don't want to give it up.

This is going to be a busy week for earnings reports, and HAL is either going to provide a little lift to the O&G sector (but at the demise of SLB's share price), or the entire sector is about to start off this coming week with a double tap to the Head & Shoulders.