January 2014 – Page 3

January 23, 2014

Daily Market Update – January 23, 2014 (Close)

(see all trades this option cycle) Daily Market Update – January 23, 2014 (Close) What a day, but at least it was another good day to be Carl Icahn. Oh, to be Carl Icahn. While the market was getting everyone’s attention by being down more than 200 points at its lowest, just 30 minutes before the closing bell, Carl Icahn was sitting pretty. eBay, the newest in the Icahn family, as we would find out later, was widely expected to have a throw away earnings report this quarter and analysts were expecting shares to fall 5% or more. This was a company that barely two months ago was widely derided, yet like Caterpillar, which equally caught slings from everyone, just kept moving higher, at a time when the overall market was beginning to lose its way. But I also thought that eBay would likely see shares fall at earnings and welcomed the idea, because that would bring it back to rollover price territory and eBay has been a great stock for that kind of play. Instead, eBay took the opportunity to time the announcement of Carl Icahn having picked up a stake in the company and wanting two board seats for his less than 1% share of ownership. Shares, of course, responded as they usually do when Icahn gets involved and went wildly higher in the after market, although settling down by the pre-open market this morning, yet heading in a direction opposite that of the broad market, which was looking to open trading with a triple digit loss. Of course, he also owns Apple and has added another billion or so, timed perfectly with shares moving higher. Apple happens to report earnings next week. Then there’s Netflix. Despite having sold of portion of his shares to take immense profits a few months ago, Icahn still owns about 4% of a company that just reported earnings and saw its shares climb 17% in the pre-open. And then there’s the rest of us. The people who are unable to move a stocks price by virtue of a Tweet, although I must say I still get a thrill when I see an option sale executed and my trade represents 100% of the day’s volume at that moment in time. For just that moment in time, I am the market. Still, not quite Carl Icahn territory. What is fascinating is that there is reportedly so much cash on the sidelines. Carl Icahn has it. Companies have record amounts of cash even after record buybacks and reportedly there is still lots of money wallowing away in bonds or money markets. At the moment it seems as if only investor activists and those share buybacks are able to maintain the market at these levels.. Whether its Dan Loeb, David Einhorn or Carl Icahn, the reality is that that are relatively few people that can create substantive movements in shares and even they have limited resources. At the moment, Carl Icahn is involved in as many companies as can be imagined. It’s hard to envision him doing much more without dropping some other positions. Of course, a victory as with Netflix opens up lots of other opportunities and his continuing stake there could easily fuel more activity elsewhere. Yet these high profile stock stories are bound to have a natural limit, just as share buybacks have their limits and are actually a poor use of money when shares are already so high, as has been the practice of companies such as Cisco and IBM. So I keep asking myself what will propel the market forward and I keep having a difficult time coming up with an answer. But somehow the market has kept right on going, even when the fundamentals haven’t warranted the rise. What is somewhat telling, and may confirm the role of Quantitative Easing, is that the market hasn’t been the same since the initiation of the taper has been announced. The next challenge may simply be the announcement of an increase in the taper, thereby reducing the amount that the Federal Reserve introduces into the market. At that point we may get back to the quandary of whether good news is bad and bad news is good. In the meantime, earnings are relatively straightforward and guidance even more so. Today, it was obvious that bad news was bad news. It takes more than Netflix to be a reflection of an economy that’s turning around.. Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 23, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 23, 2014

Daily Market Update – January 23, 2014

(see all trades this option cycle) Daily Market Update – January 23, 2014 (9:30 AM) Oh, to be Carl Icahn. eBay, was widely expected to have a throw away earnings report this quarter and analysts were expecting shares to fall 5% or so. This was a company that barely two months ago was widely derided, yet like Caterpillar, which equally caught slings from everyone, just kept moving higher, at a time when the overall market was beginning to lose its way. But I also thought that eBay would likely see shares fall at earnings and welcomed the idea, because that would bring it back to rollover price territory and eBay has been a great stock for that kind of play. Instead, eBay took the opportunity to time the announcement of Carl Icahn having picked up a stake in the company and wanting two board seats for his less than 1% share of ownership. Shares, of course, responded as they usually do when Icahn gets involved and went wildly higher in the after market, although settling down by the pre-open market this morning, yet heading in a direction opposite that of the broad market, which was looking to open trading with a triple digit loss. Of course, he also owns Apple and has added another billion or so, timed perfectly with shares moving higher. Apple happens to report earnings next week. Then there’s Netflix. Despite having sold of portion of his shares to take immense profits a few months ago, Icahn still owns about 4% of a company that just reported earnings and saw its shares climb 17% in the pre-open. And then there’s the rest of us. The people who are unable to move a stocks price by virtue of a Tweet, although I must say I still get a thrill when I see an option sale executed and my trade represents 100% of the day’s volume at that moment in time. For just that moment in time, I am the market. Still, not quite Carl Icahn territory. What is fascinating is that there is reportedly so much cash on the sidelines. Carl Icahn has it. Companies have record amounts of cash even after record buybacks and reportedly there is still lots of money wallowing away in bonds or money markets. At the moment it seems as if only investor activists and those share buybacks are able to maintain the market at these levels.. Whether its Dan Loeb, David Einhorn or Carl Icahn, the reality is that that are relatively few people that can create substantive movements in shares and even they have limited resources. At the moment, Carl Icahn is involved in as many companies as can be imagined. It’s hard to envision him doing much more without dropping some other positions. Of course, a victory as with Netflix opens up lots of other opportunities and his continuing stake there could easily fuel more activity elsewhere. Yet these high profile stock stories are bound to have a natural limit, just as share buybacks have their limits and are actually a poor use of money when shares are already so high, as has been the practice of companies such as Cisco and IBM. So I keep asking myself what will propel the market forward and I keep having a difficult time coming up with an answer. But somehow the market has kept right on going, even when the fundamentals haven’t warranted the rise. What is somewhat telling, and may confirm the role of Quantitative Easing, is that the market hasn’t been the same since the initiation of the taper has been announced. The next challenge may simply be the announcement of an i ncrease in the taper, thereby reducing the amount that the Federal Reserve introduces into the market. At that point we may get back to the quandary of whether good news is bad and bad news is good. In the meantime, earnings are relatively straightforward and guidance even moreso. Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 22, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 22, 2014

Daily Market Update – January 22, 2014 Close

(see all trades this option cycle) Daily Market Update – January 22, 2014 (Close) Earnings continue this morning and most of the early talk was about once invincible IBM, which will open weighing heavily on the DJIA. While there’s still a lot of earnings to go, following the script set by the financials over the past few earnings seasons, the remaining sectors have been lagging, even when expectations are lowered. One factor mentioned this morning was the cautious mood expressed by those reporting good earnings. Certainly, when you hear that forward earnings may be impacted by a variety of factors even good last quarter numbers become meaningless. But if there seems to be agreement that the near term future will be challenging, what becomes the basis for sending the market higher? Where is the economic growth? So far January 2014 seems to be taking that issue much more seriously than at any point in 2013. This morning started in a very interesting way and saw some wild gyrations in a couple of stocks that I was following for earnings. In both cases I decided yesterday that the reward for making the trades prior to earnings didn’t offset the perceived risk. But this morning after both Coach and Cree released earnings I was ready to make some short term trades, albeit with the sale of puts, rather than covered calls. In one case, I was able to sell $48 puts on Coach, but before I could even get the Trading Alert sent, shares reversed direction and the premium was almost cut in half. Then I did get a Trading Alert sent on shares of Cree. In that case, it reversed direction almost instantaneously with having sent the alert. I always like looking at the 1 minute charts to see the really wild moves and wonder what causes such pronounced and sudden shifts. In some cases it’s panic and in other cases it’s just fear of missing out (FOMO). I can’t really understand what other factors might be involved, especially when there is significant volume. For example, take a look at the 1 minute charts of both Anadarko and British Petroleum today at 10:07 AM. What they had in common was buying from those with uncontrollable FOMO, as news came out that David Einhorn had established large positions in both. For the casual investor that should suggest that a very smart person believes that litigation liabilities for both of those companies have been defined and as such, are no longer real liabilities. At the time of the Cree Trading Alert, at 9:40 AM, options were trading at 0.89. By 9:42 AM it was down to $0.57, then a minute later $0.40 and then another minute later was down to $0.34. The Coach movement was actually more dramatic, because for 2 minutes it was trading hands at about $1.70 and then went straight to $0.60 and then in another 2 minutes was at $0.37. In the case of Coach, it has almost a 2 year history of disappointing on earnings and then simply recovering. Although it’s easy to be wrong, I didn’t expect shares to go much lower than where the pre-open trading had it. I was surprised, however, to see how quickly it had recaptured much of the early loss. Cree, on the other hand started with a nice gain after yesterday evenings earnings release, but saw it pared a little in the pre-market. It opened nicely higher, but then gave up much of the gain. At that point I thought it was a good time to sell puts expiring in just 3 days. Apparently at about the same time someone, possibly a single buyer, thought it was a good idea picking up shares, that maybe they thought were bargain priced. The option volume also jumped very quickly, normally suggesting that money was following other people’s money. However, in this case, much of that option volume was in this Friday’s expiration. That suggests that the very same people who bought shares also bought the options, because there’s otherwise too much of a risk of buying blindly options that expire in less than 3 days. Not my problem, I suppose. Unfortunately. What I do know, however, is that while we hear and see significant spikes in option volume on short term contracts, most often they end up expiring worthless or are rolled over by the buyer, who adjusts his thesis by increasing the time frame. Those are the kind of people that I like selling my options to. Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 22, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
< /p> See all Trade Alerts for this monthly option cycle

January 22, 2014

Daily Market Update

(see all trades this option cycle) Daily Market Update – January 22, 2014 (10:45 AM) Earnings continue this morning and most of the early talk was about once invincible IBM, which will open weighing heavily on the DJIA. While there’s still a lot of earnings to go, following the script set by the financials over the past few earnings seasons, the remaining sectors have been lagging, even when expectations are lowered. One factor mentioned this morning was the cautious mood expressed by those reporting good earnings. Certainly, when you hear that forward earnings may be impacted by a variety of factors even good last quarter numbers become meaningless. But if there seems to be agreement that the near term future will be challenging, what becomes the basis for sending the market higher? Where is the economic growth? So far January 2014 seems to be taking that issue much more seriously than at any point in 2013. This morning started in a very interesting way and saw some wild gyrations in a couple of stocks that I was following for earnings. In both cases I decided yesterday that the reward for making the trades prior to earnings didn’t offset the perceived risk. But this morning after both Coach and Cree released earnings I was ready to make some short term trades, albeit with the sale of puts, rather than covered calls. In one case, I was able to sell $48 puts on Coach, but before I could even get the Trading Alert sent, shares reversed direction and the premium was almost cut in half. Then I did get a Trading Alert sent on shares of Cree. In that case, it reversed direction almost instantaneously with having sent the alert. I always like looking at the 1 minute charts to see the really wild moves and wonder what causes such pronounced and sudden shifts. In some cases it’s panic and in other cases it’s just fear of missing out. I can’t really understand what other factors might be involved, especially when there is significant volume. AT the time of the Cree Trading Alert, at 9:40 AM, options were trading at 0.89. By 9:42 AM it was down to $0.57, then a minute later $0.40 and then another minute later was down to $0.34. The Coach movement was actually more dramatic, because for 2 minutes it was trading hands at about $1.70 and then went straight to $0.60 and then in another 2 minutes was at $0.37. In the case of Coach, it has almost a 2 year history of disappointing on earnings and then simply recovering. Although it’s easy to be wrong, I didn’t expect shares to go much lower than where the pre-open trading had it. I was surprised, however, to see how quickly it had recaptured much of the early loss. Cree, on the other hand started with a nice gain after yesterday evenings earnings release, but saw it pared a little in the pre-market. It opened nicely higher, but then gave up much of the gain. At that point I thought it was a good time to sell puts expiring in just 3 days. Apparently at about the same time someone, possibly a single buyer, thought it was a good idea picking up shares, that maybe they thought were bargain priced. The option volume also jumped very quickly, normally suggesting that money was following other people’s money. However, in this case, much of that option volume was in this Friday’s expiration. That suggests that the very same people who bought shares also bought the options, because there’s otherwise too much of a risk of buying blindly options that expire in less than 3 days. Not my problem, I suppose. Unfortunately. What I do know, however, is that while we hear and see significant spikes in option volume on short term contracts, most often they end up expiring worthless or are rolled over by the buyer, who adjusts his thesis by increasing the time frame. Those are the kind of people that I like selling my options to. Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 21, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 21, 2014

Daily Market Update – January 21, 2014 (Close)

(see all trades this option cycle) Daily Market Update – January 21, 2014 (Close) With everyone of any importance being in Davos for the 2014 Global Economy meeting, it’s a good week to have almost no economic news scheduled to be released. Instead, it’s a week of photo opportunities in the snow and dealing with the avalanche of earnings, not to be confused with actual avalanches in the Swiss mountain resort of Davos. Starting the week is unexpected news that activist Dan Loeb is taking a stake in Dow Chemical. He was very successful recently in Yahoo!, probably getting out way too early and then not quite as successful with his interest in Sony. Dow Chemical was a stock bought 9 times in 2013 and another 7 times in 2012. I was anxious to buy it again, but it suddenly is set to escape its longstanding mediocrity in its trading which is more than a decade long. While I hate seeing a reliable stock get removed from rotation, this is an important bit of news, based on Dow’s market capitalization. Although Yahoo! is now a $40 billion company, it was far from that when Loeb became involved. Dow Chemical is already a $52 billion company and Loeb’s ownership is “only” about 2% of the market capitalization That kind of commitment to a company that is closely tied with economic growth and expansion is a vote in that direction. The vote is in the way that counts most; with Loeb’s own money. While no one has a crystal ball, Loeb’s interest in Dow Chemical is interesting in what many think is the very late stage of a stock market bull run. Clearly, Loeb doesn’t believe that the top is near. What we don’t know is what Loeb’s time frame is, as he has shown the inclination to move on. The longer his time frame, the less relevance his actions have on how to look at tomorrow or the day after. Given some of the details surrounding Dow Chemical’s Board of Directors, it appears as if there is almost a year before any board seats could be gained, so in the interim the changes at Dow, if any should be slow and strategic in nature. That means that even if Dow has escaped its trading orbit and gone to a new level, it may still be attractive even at that higher level, as its option premium is likely to increase and it has a nice dividend. But that’s a consideration for tomorrow or the day after. Today the consideration is just how real the pre-market climb is and how much staying power it has. No doubt the Dow Chemical news adds fuel to whatever nascent buying there has been lately. As it would turn out there was no staying power, but the market recovered most of its early losses. Ib fact, the broad market did much better than the narrow DJIA and was up for the day. With the start of the February cycle and already having this week’s option expirations populated, as well as some for the following week, the goal will be to continue that diversification, where possible. At about 40% in cash, I’m again willing to get down to the 25% level, but not too likely to jump in on a strong open for the week and more likely to want to stick to lower volatility names, although some of the earnings trades do look a little tempting. For now, though, the focus is still on reasonable safety, premiums and dividends while waiting for some sign of direction that has been slow in coming since the start of the New Year. Unfortunately, today wasn’t the kind of day to easily identify many prospects. With a trade shortened week the premiums were already 20% lower and volatility went down even further today, taking premiums with them. As much as I wanted to grab some more dividends, I just couldn’t justify those trades today. The same applies to those positions reporting earnings after tod ay’s closing bell or before trading tomorrow. In those cases, however, the premiums were good, but I don’t like making the trades when those stocks are moving higher. On the other hand, as some prices did fall today, other potential opportunities may be creating themselves, such as Starbucks, which was downgraded in advance of earnings Thursday afternoon and has already fallen about 7% in the past week. Tomorrow is another day. Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 21, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 21, 2014

Is Jeff Bezos Killing Capitalism?

(A version of this article appeared on TheStreet)

My guess is that if you asked people to describe the face of the individual most tied to the idea of destroying capitalism you would evoke images of Marx, Lenin or Castro, men of distinctive features and great bluster who made no secret of their disdain.
Ask me and I see a man who is softly spoken, clean shaved, spares the bluster, lacks distinct or memorable features, although possesses a distinctive laugh and has greatly benefited from the system he is destroying. I see Jeff Bezos as the anti-capitalist who is methodically destroying the foundations that allowed the United States to thrive.
First, let’s acknowledge that Amazon (AMZN) is an American success story. Financed by family funds and embracing technology as none had before, it survived an era that many did not and turned a concept into reality that has subsumed retailing, forcing retailers to create online shopping strategies.
Amazon will report its earnings on January 30, 2014. While I don’t invest with items such as P/E, in mind, I know enough that Amazon’s P/E of 1414 puts to rest the derisive comments about it being a non-profit. But I also know that no one believes in the axiom “we make it up in volume” more than Amazon, which had a 0.19% profit margin last year, compared to a sector average of 9.5%. Of 20 national retailers, only four had profit margins lower than Amazon; JC Penney, Sears Holdings, Best Buy and Aeropostale.
And that is precisely the problem. That is how Amazon is killing capitalism in its methodic march to eliminate competition, beginning with the already wounded. As the saying goes, “the market can stay irrational longer than you can stay solvent.” Bezos, though, isn’t being irrational, as demonstrated by competitors that are slowly melting into irrelevancy. With size comes power, in this case pricing power, which to a degree has been supported by an asymmetric application of sales tax collection requirements. In essence, indirect government support undermining existing capitalist structure in support of a venture evolving toward a monopolistic or market controlling position.
At a time when consumer discretionary spending doesn’t appear to be consistent with an expanding and improving economy price sensitivity remains an important motivator and Amazon maintains its advantage by aggressive pricing at the expense of margins. With over $70 billion in revenues it trails Wal-Mart, but exceeds the combined revenues of Sears, JC Penney and Kohls, while matching Target’s revenues. The latter two companies have scarce cushion in their profit and operating margins to withstand further erosion by an energized Amazon, ready to continue decreasing its margins, as it has done over the past 3 years.

AMZN Profit Margin (Quarterly) data by YCharts
Don’t get me wrong. I am a capitalist through and through and believe that competition is what drives us forward, while other systems are left to the ash heaps of history along with the dodo. The same fate should befall businesses that simply can’t compete on the basis of that blend of price and quality that appeals to varying segments of the population.
Competing against Amazon, however, is somewhat like the Aztecs being faced with gunpowder propelled projectiles.
Admittedly, I shop Amazon and will probably continue doing so even as it increasingly loses the sales tax advantage it held over brick and mortar retailers. However, it is now that next phase, as that artificial pricing advantage disappears, that Amazon can only do one thing to maintain its position. It has to further reduce its profit margins.
While Bezos may not be acting irrationally, investors may be accused of doing so, particularly in light of margins. Most any other retailing CEO would have been shown the door with performance such as Amazon delivers. However, it’s share price that talks and you can’t argue with a P/E of 1414, except that it’s 1414. The realization that profits and return on equity are important concepts is currently suspended as there is implicit buy-in from investors that the strategy of driving the competition out of business is a sound one in anticipation of even greater share appreciation rewards. Clearly the vision of near monopolistic existence has its perceived reward.
While Amazon may not solely be to blame for the woes at JC Penney (JCP) and Sears (SHLD), it may not be entirely coincidental that JC Penney and Sears profit woes began in earnest at the time that Amazon’s own profit margins began decreasing in 2011. Amazon is undoubtedly a contributor not just to those growing losses, but also to the degradation of the shopping experience as so graphically illustrated in a recent series of articles by Rocco Pendola. When you can no longer compete on the basis of price and are unable to generate sales revenues and cash flows, the only recourse remaining is to cut costs.
Fewer employees, bare shelves and lack of facilities maintenance are the natural next stages. As predictable as the “Five Stages of Grief,” except there may be no end stage healthy resolution in sight.
While Bezos is on a path that endangers capitalism, his continued success may really jeopardize Amazon’s own shareholders whose fortunes are predicated on a model that history has shown can’t be sustained. Eventually, profits and not promises, are the engine that drive companies and their stocks. Sooner or later, cash flow is no substitute for profits.
If you want to see capitalism saved, the answer is a plummeting Amazon share price and subsequent investor pressure to increase profit margins, restoring balance to the retail sector and giving the likes of JC Penney and Sears the ability to dodge those projectiles.

January 21, 2014

Daily Market Update – January 21, 2014

(see all trades this option cycle) Daily Market Update – January 21, 2014 (9:45 AM) With everyone of any importance being in Davos for the 2014 Global Economy meeting, it’s a good week to have almost no economic news scheduled to be released. Instead, it’s a week of photo opportunities in the snow and dealing with the avalanche of earnings, not to be confused with actual avalanches in the Swiss mountain resort of Davos. Starting the week is unexpected news that activist Dan Loeb is taking a stake in Dow Chemical. He was very successful recently in Yahoo!, probably getting out way too early and then not quite as successful with his interest in Sony. Dow Chemical was a stock bought 9 times in 2013 and another 7 times in 2012. I was anxious to buy it again, but it suddenly is set to escape its longstanding mediocrity in its trading which is more than a decade long. While I hate seeing a reliable stock get removed from rotation, this is an important bit of news, based on Dow’s market capitalization. Although Yahoo! is now a $40 billion company, it was far from that when Loeb became involved. Dow Chemical is already a $52 billion company. That kind of commitment to a company that is closely tied with economic growth and expansion is a vote in that direction. The vote is in the way that counts most; with Loeb’s own money. While no one has a crystal ball, Loeb’s interest in Dow Chemical is interesting in what many think is the very late stage of a stock market bull run. Clearly, Loeb doesn’t believe that the top is near. What we don’t know is what Loeb’s time frame is, as he has shown the inclination to move on. The longer his time frame, the less relevance his actions have on how to look at tomorrow or the day after. Given some of the details surrounding Dow Chemical’s Board of Directors, it appears as if there is almost a year before any board seats could be gained, so in the interim the changes at Dow, if any should be slow and strategic in nature. That means that even if Dow has escaped its trading orbit and gone to a new level, it may still be attractive even at that higher level, as its option premium is likely to increase and it has a nice dividend. But that’s a consideration for tomorrow or the day after. Today the consideration is just how real the pre-market climb is and how much staying power it has. No doubt the Dow Chemical news adds fuel to whatever nascent buying there has been lately. With the start of the February cycle and already having this week’s option expirations populated, as well as some for the following week, the goal will be to continue that diversification, where possible. At about 40% in cash, I’m again willing to get down to the 25% level, but not too likely to jump in on a strong open for the week and more likely to want to stick to lower volatility names, although some of the earnings trades do look a little tempting. For now, though, the focus is still on reasonable safety, premiums and dividends while waiting for some sign of direction that has been slow in coming since the start of the New Year. . Access prior Daily Market Updates by c licking here *OTP Sector Distribution as of January 17, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 20, 2014

Taking Solace in an Earnings Challenged Coach

(A version of this article appeared in TheStreet)

It has been very easy to be disparaging of Coach (COH) these days.

In 2013, including dividends, an investment in Coach shares witnessed a 3.1% ROI, as compared to 29.6% for the S&P 500, exclusive of dividends.

Perhaps the root cause of the quantitative disappointment has been the near universal acknowledgement that Coach was no longer a very interesting place to shop, as Michael Kors (KORS) had displaced it in the hearts and more importantly, the literal and figurative pocketbooks of shoppers.

The first hint of trouble presented itself in August 2011 when shares plunged 6.5% after announcing earnings, following years of running higher, that took only a short rest in June 2010. While shares went bacl to their old ways of climbing higher under CEO and Chairman Lew Frankfort that climb came to a decided halt shortly after the Michael Kors IPO.

In 2013 Coach knew only large price moves following earnings reports, following the pattern that began in 2012. The difference, however, was that in 2013 all but one of those large price moves was higher, with -16.1%, +9.8%, -7.8% and -7.5% earnings related responses greeting increasingly wary and frustrated shareholders.

Coach reports its second quarter earnings on January 22, 2014 prior to the market’s open. The option market is implying a nearly 10% move upon that event, which comes on the heels of a 6.3% decline in shares in the past week.

For most, that may mean that this would be a good time to steer clear of Coach shares or even consider exiting existing psoitions, especially as the retail sector has been struggling to get consumers to part with their discretionary cash.

In the past year, while Coach has been a non-entity, I have owned it and sold calls on shares, or sold puts on eight occasions. Included in those trades were three sales of put options on the day prior to earnings and one purchase of shares and sale of calls on the day following disappointing earnings.

COH data by YCharts

During that time Coach has fulfilled two of my cardinal requirements in that it has been a model of mediocrity, but still has something to offer and will do more than simply make a pretense of maintaing a business model.

My goal with Coach, as with all positions upon which I use a covered option strategy is to make a small rate of return and in a short time frame. My ideal trade is one that returns a 1% profit in a week’s time and surpasses the performance of the S&P 500 during the time period of the trade.

During 2013, the cumulative return from the eight Coach trades was 25.4% and the average holding period was 28 days. The average trade had an ROI of 3.2%, which when adjusted for the average holding period was less than the 1% goal, consistent with the lower premiums obtained in a low volatiity period. However, during the same time periods for each trade, the results surpassed the S&P 500 performance for the same time periods by 18.5%.

Coach 2013 Performance - Option to Profit

While I don’t place too much credibility on annualizing performance, the annualized performace of Coach, utilizing the serial covered option strategy, with some trades timed to coincide with earnings was 41.5%, while the annualized S&P 500 return was 34.7%. A longer period of observation also yielded similar favorable results

In the case of potential trades seeking to reach those objectives when earnings are to be released, my preference is to see whether there is an option premium available for the sale of puts that is at the extreme end of the implied volatility range or beyond. For Coach, the implied volatility suggests expectations of a price move in the $47.50 to $57.50 range, based on Friday’s closing price of $52.56.

The $47 January 24, 2014 put premium satisfies the quest for a 1% return and is at a strike price slightly outside of the implied volatility range. Essentially, the risk-reward proposition is a 1% return in the event of anything less than a 10% drop in share price. Anything more than a 10% price drop creates additional possibilities to generate returns, but extends the period of the trade.

As always, the sale of puts should only be undertaken if you’re prepared to take ownsership of shares at the strike price specified. While I wouldn’t shy away from share ownership in the event of a larger than anticipated price drop, I would be inclined to consider rolling over the put sale into a new expiration date and ideally at a lower strike price, if possible, repeating that process until expiration finally arrives.

While not everyone appreciates leather, everyone can appreciate investment profits, even if they come at the expense of corporate losses and a fall from grace.

January 19, 2014

Daily Market Update – January 19, 2014 (Close)

(see all trades this option cycle) Daily Market Update – January 19, 2014 (Close) The Week in Review and the Weekend Update are now posted. Markets will be closed on Monday in honor of Dr. Martin Luther King, Jr. Day. . Access prior Daily Market Updates by clicking here *OTP Sector Distribution as of January 17, 2014** * Assumes equal number of shares in positions Posting of trades is not a recommendation to execute trades
Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM Friday? See Week in Review for summary statistics and performance Sunday? See Weekend Update for potential stock choices for coming week Any day? See Performance for open and closed positions Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis
See all Trade Alerts for this monthly option cycle

January 19, 2014

Weekend Update – January 19, 2014

As you get older you realize certain truths and realities and they aren’t always warm and fuzzy.

One of those realities is that often many years of marriage come to an end once the children have left the household. Without the diversion of children always in need comes the realization that there is nothing of substance to hold together a failing foundation. Sometimes the realization is there, but swept under the rug as other events take precedence, but you always know that someday reality can no longer be delayed.

With my youngest child having graduated college that appears to be the story that we’ve heard on multiple occasions from like aged acquaintances and friends. Like most everything else in life there are parallels to the stock market.

We now find ourselves in a market faced with certain realities but without the diversions offered by European monetary crises, sequestration, fiscal cliffs, government shutdowns, quantitative easing, credit downgrades and budgetary deadlines. Those diversions conveniently removed focus from the very foundation upon which stocks find their fair price and to which markets have traditionally responded.

All that is now left behind is earnings and it’s not a pretty prospect.

Perhaps in a manner similar to those in long standing unions who suddenly suffer from improved judgment following a youth blinded by the superficial, the market went through a period of not being terribly discerning and always finding reason to go higher. Interpreting economic news to be something other than what it is has its counterpart in idealizing the idea more than the hard facts.

The reality that is being faced is that of earnings and the failing of earnings to support an ongoing rise in the stock market.

Early suggestions that this earnings season would result in a 6% increase could only be the result of optics as publicly held shares have diminished through massive stock buybacks. However, it doesn’t take much insight to realize that the abysmal state of retail earnings has to have some meaning with regard to the ability of individuals to find discretionary spending within their reality.

As with the past two quarters with the big money financial centers reporting positive earnings, there is little reason to believe that will extend to the other members of the S&P 500 as they begin their reporting in earnest this week.

I’m prepared for the reality, but I still like the fantasy, so I expect to continue playing along this week, just a little more mindful of the obstacles that have a lot of catching up to do.

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).

Among those reporting earnings this week is Coach (COH) which had fallen 6.2% last week, in preparation for what has become a near regular occurrence in the past 18 months upon earnings. While its most recent past has been to shed significant value when all is bared the option market is expecting an implied move of nearly 10%, in addition to the recent weakness. While Coach has had its competitive challenges it has somehow been able to find a fairly well defined trading range, punctuated with some significant moves and periods of recovery or occasionally, decline. In 2013, I traded Coach for all earnings reports, three of which were through the sale of puts. Despite the dramatic moves following all of last year’s earnings reports, predominantly lower, Coach has been and may continue to be an erratic position that offers acceptable reward for defined risk.

Cypress Semiconductor (CY) also reports earnings this week. Just a few months ago, prior to its last report, it did what many have been doing of late and offered some earnings warnings and saw shares plummet more than 20%, leaving virtually nothing more to fall. Like Coach, Cypress Semiconductor has a habit of seeing its share price gravitate back toward a set level with some regularity. Having already fallen approximately 4% in the past two weeks. While the option market is implying a 9% move this week as earnings are announced, I think that it will be much less pronounced and more likely to have some upside potential. After having shares assigned this past Friday, rather than selling puts,as I often do when earnings are at hand, I am considering the purchase of shares and sale of calls on only a portion of shares or at both the $10 and $11 levels to potentially capitalize on share appreciation.

Anadarko (APC) had a brief spike in price this past week, nearly three weeks after plummeting upon news that it might be facing a $14 billion judgment in a case involving a company that it had purchased several years ago. The spike came as Anadarko stated that it believed the judge in the case set damages that were punitive, rather than remedial and believed that the appropriate amount was more in the $2 billion range. It will likely take a long time to come to some resolution, but even at $14 billion there is certainty and the ability to move forward. As shares seem to be creating a new base I think this is a good entry point, as well as a good point to add shares to start the process of offsetting the paper losses from older shares.

Chesapeake Energy (CHK), while trading in a range of late, has also been trading with relatively large daily and intra-day moves. As a result shares enjoy generous option premiums that reflect the volatility, despite having traded in a very stable range for the past 5 months. Offering expanded weekly options I would consider selecting an expiration prior to the scheduled February 20, 2014 earnings report date.

Having already announced earnings Unitedhealth Group (UNH) added to its recent losses and is now down approximately 5% since its recent high. It appears to have some price support a dollar lower than its current price, which may be a good thing considering the unknowns that await as more news trickles in regarding registration demographics and utilization among newly enrolled health care policy holders. While I never move into a position with the idea that it will be a long term holding, I don’t hold too much concern for that unwanted possibility as it’s as likely to recover from any price drops as most anything else and could easily be justified as being a core holding.

The potential dividend choices this week share a “household theme” covering aspects of the kitchen, laundry room and bathroom, but represent different ends of the consumer spectrum when defensive investing is foremost.

While Clorox (CLX) and Colgate Palmolive (CL) may be best known for consumer staples and nothing terribly ostentatious, Williams Sonoma (WSM) offers products that are every bit as critical to some. Those who would sacrifice anything to ensure that they can purchase an oversized block of Mediterranean pink salt have money every bit as valuable as those that like bright white shirt collars and bright white teeth.

More importantly, at least for me, they have all recently under-performed the S&P 500 and all trade with a low beta at a time that I want to balance risk and still generate a reasonable income stream from premiums and dividends. While both Clorox and Colgate Palmolive have earnings reports due in the February option cycle, WIlliams Sonoma, which tends to trade with more volatility upon earnings, does not report until the end of the March 2014 cycle.

Finally, for those who really seek reckless adventure, perhaps only frolicking in a landfill brimming with its products offers more excitement than considering shares of LED light bulb maker Cree (CREE) in advance of earnings. The last time I considered an earnings related trade in Cree I didn’t recommend the purchase or sale of puts to my subscribers, but did make the put sale for my personal account. However, I did so only after earnings, believing that the 16% drop offered sufficient protection to make an out of the money put sale with relative impunity.

Like some other stocks this past week that continued to fall even days after earnings plunges, that’s what Cree did. Rolling over the puts on a few occasions, eventually taking assignment and then selling calls until its final assignment at a strike level 5% higher than the original put strike price made it worthwhile, but more thrilling than necessary.

So unnecessary that I may be ready to do so again.

Traditional Stocks: Anadarko, Unitedhealth Group

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Colgate Palmolive (ex div 1/22), Clorox (ex-div 1/27), Williams Sonoma (ex-div 1/22)

Premiums Enhanced by Earnings: Cree (1/21 PM), Coach (1/22 AM), Cypress Semiconductor (1/22 AM)

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.