Month: December 2013

How do you follow up a year in which the market has advanced nearly 30%? If you look at the historical data the year after a great year such as the one we’ve just had tends to be quite good, too – just not as good. While comparison isn’t really worthwhile, after all, it’s the accumulation of assets that really has meaning from year to year, you can’t help but feel some disappointment when comparisons are made to a stellar year.

As I look at charts I’m struck by how similar so many charts look as the year draws to a close. So many stocks are at or near their highs for the year, making it hard to find any bargains and making it especially hard to find value among well regarded stocks.

From my jaded perspective that sets one up for disappointment, even if the direction is still higher.

Buying at the high isn’t a great strategy, it also tends to set you up for disappointment, but there may not be very many alternatives. Similarly, buying after a significant run higher nay not be a good strategy, but that’s how some are starting the new year as demonstrated by MolyCorp (MCP), a stock that I do own. Shares roared ahead nearly 15% to end the week, reportedly upon the rationale in an article published in Seeking Alpha, that suggested it would be the beneficiary of the “January Effect.”

Based on Molycorp’s performance in 2012, the same expectation could have been made for the January Effect this past year and it did, in fact, last all of six days, but was not preceded by a similar price surge. After that sixth day shares were below where they had ended 2012, which in turn was about 60% lower where the year had started, while this year thus far shares are down a mere 41%.

While I would love to see MolyCorp sustain and even grow that price leap, particularly since I decided not to use it as a strategic tax loss, I have a hard time understanding those that climbed aboard that runaway train late in the process. But that may be exactly the same potential fate awaiting many as the new year is ready to start.

As MolyCorp demonstrated last year, even if you get off to a good start it doesn’t preclude you from flaming out.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

While believing in Santa Claus may be a tall order for anyone reading these pages, believing in the Santa Claus Rally and further believing in the January Rally may be far easier and offer reason to continue looking for investment opportunities. If those traditions do continue there is a certain degree of impunity even at such high levels and so I feel a little less concerned about some of this week’s selections. Due to the shortened trading week’s proportionately lower weekly option premiums I am also looking to use expanded options, where possible and hoping the January Rally continues to at least the tenth of January.

I was all set to purchase Apple (AAPL) last week, thinking that there was no real catalyst in the near term to send shares moving significantly in one direction or another. Then on Sunday came word of the China Mobile deal and shares advanced about 4% the next day and there went my plans to add shares. I mistakenly believed that the China Mobile deal had already been reflected in the share price, particularly since official web sites had heavy handedly starting taking orders for the iPhone before the deal was acknowledged. But even them the rise of 4% seemed relatively subdued, given the potential ability to add to Apple’s fortunes.

The more I look at Apple the more I now see a stock that will continue being a covered option play, just as it was not for most of 2012. I expect its rise to continue and am not deterred by this week’s gain, that was attenuated a bit as the week wore on. If Starbucks (SBUX) can rise effortlessly from $45 to $80, why can’t Apple do the same from $450 to $800?

While I don’t feel a compelling need to own any Apple products, I also don’t get excited about Starbucks’ offerings. Yet, I’ve been waiting too long for its shares to stop their ascent and return to what may have been irrationally low levels. After a small drop of about 4% over the past month that may be the best that I can hope for, at a time when discovering opportunities is increasingly challenging.

I’m currently woefully under-invested in the financial sector and have been waiting for a while to add correct that situation. However, that hasn’t been a terribly easy thing to do as financials climb higher and may be poised to add even more as interest rates begin their climb. Morgan Stanley (MS) has certainly had a transformation over the past two years and has seen its share price more than double and is near its yearly high. The latter would tend to have me shy away from shares. However, as the year begins I think the sector will get a boost if the overall market stays true to form and interest rates continue tes
ting the 3% level. Any interest I may have in Morgan Stanley are fueled by short term considerations only, as earnings are announced on the final day of the monthly option expiration.

I jumped the gun a bit by purchasing Bristol Myers Squibb (BMY) last Friday, hoping to capture a bit more in premium as both last week and this week are short trading weeks and as a result have even lower option premiums. Shares also go ex-dividend before New Years and my hope was either for quick assignment and re-investment or capturing both dividend and premium, while getting a portion of the dividend related reduction in share price underwritten by the option buyer. I had been considering the purchase of shares for a couple of weeks, but unfortunately couldn’t find the reason to do so. While within striking distance of its yearly high, the upcoming dividend and premium offset some of the concerns, especially going into the New Year.

I went from being an avid share holder of Anadarko (APC) to a disappointed one as word came out of a large judgment in a nearly decade old legal case involving a company that Anadarko had purchased. While the size of that judgment may still be reduced, it appears that the uncertainty associated with the issue has now been removed. Of course, for most people, before the judgment was announced the entire issue had already been forgotten, When looking for a difficult to find bargain, Anadarko may be the poster child for 2014. Now that shares seem to have stabilized I’m ready to consider adding more shares in an attempt to sacrifice them for their premiums and help to whittle down the paper losses on some older shares.

Marathon Oil (MRO) isn’t as exciting as Anadarko has made itself, but it, too, is a company that I look forward to owning after some price retracements. Now offering weekly and expanded weekly options it has become more appealing to me as I increasingly try to stagger expiration dates in order to not be held hostage by a sudden and sizeable market move and having too many eggs in a single basket. Marathon Oil is down approximately 5% from its recent high, which is about half the size of its largest retracements. While there may be some more downside potential the shorter term time commitment when considering the sale of options adds greater flexibility.

EMC Corporation (EMC) also isn’t terribly exciting, certainly less so after its spin-off of VMWare (VMW) several years ago. But in the world of covered call selling “exciting” is unnecessary. Boring and predictable is far more profitable, as long as there are some occasional hiccoughs along the way. EMC is one of those companies that does have those occasional hiccoughs, often courtesy of VMWare, that helps it to continue having an acceptable option premium, despite its fairly steady share performance. Additionally, while its dividend is also not terribly exciting, it does go ex-dividend the following week. For those considering the use of a monthly option the ROI can potentially be bumped up a bit, as a result.

Finally, LuLuLemon Athletica (LULU) is now two weeks post announcing its CEO succession and its disappointing earnings. Since then it has treaded water and that makes it an appealing consideration. Similar to last week’s discussion of Cree (CREE), if I purchase shares of LuLuLemon, I may not immediately write calls or may only do so on a portion of my shares, as I believe the next move will be decidedly higher. However, even if LuLuLemon continues to tread water it can be a very profitable holding for those that do write call options on their shares and then have the opportunity to repeatedly rollover from week to week while the stock is deciding what to do with its life.

Traditional Stocks: Anadarko, Apple, EMC Corp., Marathon Oil, Starbucks

Momentum Stocks: LuLuLemon Athletica, Morgan Stanley

Double Dip Dividend: Bristol Myers Squibb (ex-div 12/31)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

With word this week of the passing of a famed “end of the world” prophet, it may be logical to wonder “what now?”

Is there life after the destruction of the world is canceled?

As far as we know even after the most dire of events there is a future yet to come, but like anything in the future it can never be known, even if clues abound, but that won’t stop the predictions

The overwhelming opinion whenever thought of the end of Quantitative Easing was considered was negative, as it alone was thought to be propping up the stock market. As with those preparing for earthly catastrophe, investors of that belief took the opportunity to sell positions, because as we all know in the post–apocalyptic world, cash is king.

But the clarion call announcing the coming of the dreaded taper finally came and it turns out not to be the end of the world. However, as opposed to that now deceased self–anointed prophet, after two recent failed predictions of the earth’s destruction, he decided to get out of the prophesy business. That’s not likely to be the case for those who prophesied market doom in the event that the Federal Reserve punch bowl was depleted.

Those predictions will keep coming.



I don’t know what challenges are on the near term horizon but I’m hopeful that there will be a sea of calm for a while, as the DJIA is again at an all time high. Strictly speaking there is still tim
e for a Santa Claus Rally this week, although Ben Bernanke may have provided the rally last week, helping the market recover from the depths of a less than 2% decline.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I don’t really know what the next catalyst will be to propel shares of Apple (AAPL) higher, even as there are renewed calls for $700. Ever since Carl Icahn entered into the equation shares have fared very nicely, despite having given up some of those gains over the past few days. What I do know is that for those that bought shares at their price peak the last day to have qualified for short term capital losses was nearly 3 months ago. At that time a sale would have resulted in a loss of about $225. However, another way to look at it is that the sale afforded as much as a nearly $90 tax credit for some investors on the Federal side alone. Adding that credit to the sale price brings shares above Friday’s closing price. To a large degree selling pressure has been greatly relieved going forward. That’s good enough for me to consider adding shares going into the final week’s of trading for the year, particularly since the last three quarters have predictably seen a rise in shares in the 6 weeks prior to its ex–dividend date.

Annaly Mortgage (NLY) is one of the first companies I bought when starting to manage my own portfolio, but I haven’t owned shares in more than 5 years. I don’t think I ever really understood the strategy behind Annaly, as I’ve never really understood bonds, other than to know that bond traders are probably the smartest of all, even if performance doesn’t always indicate that to be the case. For most, the appeal of Annaly has been its dividend, which was just reduced, as its stock price has fallen on hard times in the year since the passing of its co–founder and CEO.

Although I don’t spend too much time looking at charts, for those that follow MACD as an indicator, Annaly’s share price crossed over the signal line, providing a bullish signal. For me, the signal is this week’s dividend, some share price stability and an option premium enhancing the dividend. Less leveraged and more hedged than in the past this may be a good time to begin interest in Annaly once again, despite a rising rate environment.

As long as I’m not going to spend too much time looking at charts, I may as well mention that Cree (CREE) did catch my attention, as it too crossed over the MACD signal line. It’s price chart is also interesting as it demonstrates some significant and sudden moves up and down over the past few months. I think that the stock is poised for a sharp move higher and this may be one of those infrequent occasions that I don’t immediately sell call options on shares, or may not cover all shares. Its lighting products are increasingly capturing aisle space and newspaper mention as incandescent bulbs fade away.

Despite still owning a much more expensive lot of Walter Energy (WLT), it has become a favorite stock of late as it has regularly bounced higher and then dropped lower, helping to create attractive option premiums at a time when those are rare finds. Of course, with those premiums comes significant risk. For those that have the tolerance it’s shares can be rewarding, but I would temper some of the reward by greatly reducing the risk by using deeper in the money strike prices and short term contracts, although expanded contracts may actually level out some of the day to day risk and still provide a meaningful premium.

Target (TGT) hasn’t recovered quite as quickly from its recent earnings drop as many, including me, believed would be the case. A strong day Wednesday, undoubtedly buoyed by the post–FOMC buying hysteria, was quickly quelled the following day on news of Target customers having their credit card security breached. What I find encouraging is how quickly Target has responded and how they are using the incident as an excuse for an additional 10% discount in the days before Christmas, hoping to lure even more shoppers for price cuts that probably would have been offered even without the security breach.

A sub–topic this week is food as represented by YUM Brands (YUM), Campbell Soup (CPB), Whole Foods (WFM) and Darden Restaurants (DRI).

YUM Brands has continued to show
great resilience to news, which invariably is greeted with negative reactions that prove to have been short sighted. Whatever the obstacle or whatever the China–centric thesis, YUM has shown that once people get a taste for fast food it’s really difficult to break the addiction. Short of widespread public health outbreaks in China, there are few barriers to performance. YUM Brands, besides offering a nice option premium and going ex–dividend later in the month, has continued seeing its beta fall and may offer less risk than before if facing a general market decline.

Whole Foods (WFM) which had been on a one way upward climb since its shares split has come down about 5% since its recent earnings report. It is embarking on a more mainstream expansion strategy while also re–enforcing its perceived commitment to a higher standard, as it announced plans to remove a very popular yogurt brand from its stores. While the exit of Jim Chanos from a long position last month may be a signal to some, the performances of stocks he sold and bought since the filing date has been mixed, at best. I’ve grown somewhat tired of waiting for shares to retreat and now think that its recent earnings related drop may be all in store, especially in an otherwise flat or rising market. Like a number of other positions this week its MACD indicates a recent buy signal which may complement an otherwise weak option premium and dividend.

Campbell Soup (CPB) may be an anachronism. Once ubiquitous in households, a panoply of alternatives, including those perceived t
o be more consistent with healthy lifestyles are available and come without cobwebs. On the positive side of the ledger Campbell has an appealing dividend right after New Years, offers an attractive option premium, low beta and it too, has recently crossed the MACD signal line. Since you don’t have to buy the product to qualify for share ownership

Finally, Among the conversations these past weeks has been talk of the worst CEO of 2013. While Clarence Otis of Darden Restaurants. was only a runner up he has fallen a long way in recent years. Shares moved up nicely several months ago when news of an activist investor’s interest became known. Shares did less well after announcing disappointing earnings at its flagship Red Lobster and Olive Garden units. However, under activist pressure Darden plans to spin off its low growth properties. Their plan may not be enough to satisfy the activists and Darden may need to explore more measures, including exploiting its real estate holdings. The good news is that Darden goes ex–dividend during the January 2014 cycle and appears to be able to maintain that dividend.

Traditional Stocks: Apple, Campbell Soup, Darden Restaurants, Target, Whole Foods

Momentum Stocks: Cree, Walter Energy, Yum Brands

Double Dip Dividend: Annaly Mortgage (ex–div 12/27)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale o
f covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.