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Thursday, 20 August 2009 01:00

In this difficult to trade market, you have to be more than just right...

From Bloomberg: Sears Holdings Reports Unexpected Loss After Pension Plan, Severance Costs

Aug. 20 (Bloomberg) -- Sears Holdings Corp., the biggest U.S. department-store company, reported an unexpected second- quarter loss on pension-plan expenses, severance payments to fired employees and costs to close stores.

The net loss was $94 million, or 79 cents per share, compared with a profit of $65 million, or 50 cents, a year earlier, Hoffman Estates, Illinois-based Sears said today in a statement distributed by PR Newswire. Analysts had projected earnings of 35 cents per share, the average of six estimates compiled by Bloomberg.

The “severe decline” in capital markets last year increased Sears’ pension expenses by an estimated $160 million to $175 million for 2009, the company said. Sales fell to $10.6 billion, below the $10.7 billion average estimate of analysts, as consumers spent less on home appliances and clothing. Like other retailers, Sears suffered as consumer spending declined in the face of rising joblessness.

“The overall retail market remains difficult,” Bruce Johnson, the company’s interim chief executive officer, said in the statement.

Expenses rose to $103 million in the 13 weeks ended Aug. 1, Sears said, after the company closed 28 outlets..

From CNBC: Sears Posts Loss, Badly Misses Forecasts

Sears Holdings badly missed expectations Thursday, when it posted a loss per share of 17 cents excluding items for the second quarter, as its US comparable store sales fell by 8.6 percent on aggregate.

I have warned my subscribers about Sears for quite some time. See:

Sears Holdings Research Report - Retail Sears Holdings Research Report - Retail 2009-01-27 01:13:07 50.42 Kb

Sears Holdings Research Report - Pro Sears Holdings Research Report - Pro 2009-01-27 01:11:41 313.25 Kb

I also commented on the very short term nature of their "alleged" beat last quarter, based on extensive cost cutting which could not mask steadily declining revenues. Revenues are where economic profits come from, not cost cutting. SeeSears Q1 2009 Update Sears Q1 2009 Update 2009-06-01 12:28:26 398.99 Kb.

Despite my being absolutely right about Sears, their share price attempted to prove me wrong...


As you can see, Sears has actually doubled from its March lows. There are absolutely no fundamentals that justify that level of share price movement. As I type this, Sears is down more than 12% ($8.92) in pre-market trading. What makes Sears so difficult to profit from is the two fold phenomenon: a) the US and global equity markets are in a full blown bubble, and b) Sears puts trade with EXTREME implied volatility, making them overpriced up and down nearly every expiration series and strike price. Thus, it is possible to have been right about Sears's prospects and situation, and still unable to turn a profit from a bearish position in it despite having the heart and fortitude to stick out a rough ride.

Of course, I have encountered this problem in my own portfolio, and have taken steps to rectify it. For those loyal subscribers that have followed my research and believe in it, I have (reluctantly) started analyzing various trade strategies to work around the irrational behavior of markets until profits, losses, assets and liabilities start to mean something again.

Last week and yesterday before earnings were released today, I analyzed and illustrated a bear spread strategy on this stock which had a very limited statistical downside, taking advantage of the high implied volatility (over pricing) of the puts to fund a bearish position. See Recent strategy analysis sample available to the public, wherein I gave away as a free sample a very limited risk strategy analysis detailing how to benefit from Sears fall without getting bit by a bubble pop. Basically, we used the high IV (overpricing of puts) to fund the bearish stance.

Below you will find a recent Sears Holding Strategy Analysis. Sear's is hard to hold a bearish position on using put options due to their extreme implied volatility - they are almost always consistently overpriced, hence the breakeven band for a market neutral strategy is usually impractically wide. These are the solutions we came up with for the January 2010 option series (subscribers usually get a full forensic analysis and a selection of strategies along several expiry series, as well as supporting data via excel spreadsheets):

SHLD Option Strategy Analysis SHLD Option Strategy Analysis 2009-08-19 03:38:19 173.90 Kb

Public Copy of SHLD Option Strategy Analysis Output sheet Public Copy of SHLD Option Strategy Analysis Output sheet 2009-08-19 03:37:24 293.00 Kb

Hopefully, those non-paying readers took the opportunity to benefit from the free intelligence. This brings me to my final point. There are literally dozens of companies in my Downloads Section that are overdue for a 20% to 70% haircut, fundamentally. I know it is quite frustrating to sit through the market skyrocketing with a bearish stance, but math is math, and the fundamentals of these companies simply do not come anywhere near supporting their share prices, or in many cases, even a fraction thereof. Just think about the technically insolvent media company with $6 billion of NEGATIVE equity that I covered not too long ago. Since, for the time being, this is a traders market and not a stock pickers market, I have instituted the recent, and sometimes apparently complex, trade strategy analyses to benefit from market neutral tactics. As you all know, I am not market neutral, I am bearish, but I am also at the mercy of the markets just like everyone else. Consider these strategies a bearish position with an active hedge. We shall see how well the Sears strategy worked out in a couple of hours assuming one unwinds the position at market open.

For those that wonder, it ain't even close to over for Sears. From CNBC: Jobless Claims Show Surprise Gain Amid Fears on Economy

The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week, as companies continued to cut payrolls amid uncertainty over the economic outlook.

Retailers don't do well when shoppers don't have jobs. Sears is a hobbled company, at best, even when macro conditions were better. Now, fuhget about it.

Last modified on Thursday, 20 August 2009 01:00

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