Weekend Update – December 7, 2014

Trying to listen to the President put forth some statistics regarding the employment situation in the United States this past week was difficult, as my attention was captured by the festive holiday backdrop.

Holding a prominent position next to our nation’s flag was what appeared to be a symbol that perhaps reflected official endorsement of Bacchanalian celebrations, together with the more traditionally accepted holiday decorations. Enlarging the photo did nothing to re-direct my imagination.

The President’s exploring the good news contained in the Employment Situation Report and trumpeting the trend in employment statistics may have been his muted version of a Bacchanalian victory lap, of sorts.

Focusing on that background item for as long as I did in wonderment caused me to lose sight of what should probably be recognized, as Friday’s Employment Situation Report indicated the addition of more than 300,000 new jobs in the past month, as well as a substantial upward revision to the previous month.

I guess that I wasn’t alone in losing focus about what’s been going on in the economy, as later that day during one of their now ubiquitous polls, CNBC viewers were asked whether President Obama was good for the stock market.

I suppose the answer may depend on the criteria one uses to define “good.” as well as whether one believes that things would have been better without him or his economic policies, or whether their time frame is forward or backward looking.

But much as the way there are those who believe Edgar Allen Poe’s could have been a much better writer if not for his addictions, it’s not very easy to prove the supposition. All you can do is to look at the body of evidence and compare it to something else.

But just like magnifying the image above may provide some answers, so too does magnifying the period of interpretation in trying to objectively answer the poll question, at least if looking backward.

As far as the stock market goes, it’s hard to imagine that it could have been much better since inauguration day of 2009. Even using the market’s earlier 2007 peak during the previous administration, the current market stands 33% higher from that point, much less the 144% since inauguration day 2009.

Doing some convoluted calculations and assumptions, during the term of the current administration that still represents a 5% annual compounded increase in the S&P from its 2007 high. Not too bad, considering what happened between October 2007 and March 2009.

Could it have been better? Sure. Has it been worse? Always.

Just as with your kids you should always take credit if they’ve done something good, whether you had any role, because you can be certain that you’ll be blamed for everything they’ve done that displeases someone.

Every now and then you also can’t be blamed for a little bit of self-congratulatory behavior, especially if no one else can bear to ever find something good to say.

The President sought to focus our attention on the positive aspects of what has been the trend in employment, but he did so a few months too late and clearly his role still isn’t readily recognized, at least by responding CNBC viewership.

But focusing just a bit and all you can see is a stronger dollar, low interest rates, flight of capital from around the world coming to the U.S, declining deficits, increasing employment, higher paying jobs and low energy prices.

Of course, that can lead you to wonder how can it get any better?

For those who answered the poll question with a forward looking time frame, their answer may be justified. All you have to do is focus on the past to see that markets don’t necessarily thrive at the same time that the economy has already been thriving. Rather markets thrive when the economy is growing.

The suggestion from Federal Reserve Governor Dudley that the fall in oil prices will drive GDP higher portends for more growth, especially since 70% of the GDP is comprised of consumer activity and those consumers are spending less on energy.

If looking for an impetus to still drive the market higher, that may be the key. While we don’t have much experience trying to understand how the stock market will react to lower energy prices that are caused by over-supply rather than declining demand, logic suggests that growth can only be fueled.

As 2015 approaches and everyone begins to jockey for political advantage for the 2016 Presidential election, the real telling sign of political opportunism comes as now everyone wants to appear agreeable and take credit for the successes in the economy.

There’s no better time for bipartisanship behavior than when faced with disaster or when faced with undeniable success. The problem that creates insurmountable schism is all of the stuff in-between.

With some good news at hand and a few more weeks to go in what is traditionally one of the best months every year, there is reason to continue to be optimistic that growth still lies ahead and that the stock market will follow, despite being at new highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

This week I’m almost evenly divided between risk and safety, as my tolerance for risk is increased in the belief that the current environment will allow the market to continue moving higher, even if only in small increments, until the end of the year.

I currently own shares in The Gap (NYSE:GPS) and Whole Foods (NASDAQ:WFM). Both are fairly staid kind of companies but have their moments.

For Whole Foods most of those moments have taken it lower over much of the past year, beginning with cold weather related sales declines and an aggressive national expansion.

Most recently, however, after a string of disappointing earnings reports Whole Foods may be back on track. As it has done so its option premiums have been increasing even in an environment of ever decreasing volatility in the broader market.

While shares have gone substantially higher since its recent earnings release they are simply back to the level from which they plunged in May 2014. Absent a recurrent bout of crippling weather as it prepares for its next earnings release there’s not much reason to expect shares to give up much ground.

The Gap is a company that doesn’t really have too much that distinguishes itself from the crowd, but sometimes it pays to not stand out. What amazes me about The Gap is that while it still reports monthly sales statistics those reports tend to alternate on a monthly basis between disappointing and better than expected and the market has routine knee jerk responses that send share price gyrating for no plausible reason.

In the meantime The Gap offers both reasonable option premiums, especially in advance of the monthly same store sales and a reasonable dividend.

It reported those same store sales this past week and after an initial exuberant reaction, shares settled virtually unchanged for the day, but at a level low enough to consider buying shares to replace those that were assigned and complement those that were rolled over.

Astra Zeneca (NYSE:AZN) has traded in a remarkably narrow range ever since the disappointment of not being part of a proposed tax inversion. That kind of stability is a great environment for covered option sales, although at a 90 P/E, it is multiples greater than any of its sector peers, introducing an element of risk into an otherwise stable price.

While most have given up on prospects of a “Round 2” buyout Astra Zeneca still may represent a jewel in someone’s eye particularly as it has lagged significantly lagged both the Health Care Select SPDR Fund (NYSEARCA:XLV) and the S&P 500 since the initial buyout bid was dropped. Its option premiums suggest that there is still some intrigue left in this name.

Campbell Soup (NYSE:CPB) is a fairly boring kind of company that has also traded in a fairly narrow range, further giving the appearance of mediocrity. While its most readily identifiable products seem to be taking less and less space on supermarket shelves it somehow maintains its revenues.

With that boredom, however, comes a fairly good option premium and an attractive dividend. Since it only trades monthly options and the next dividend comes in the January 2015 option cycle, some consideration may be given to using that longer term time frame if also interested in a dividend capture.

With almost any time frame you select over the past 10 years General Electric (NYSE:GE) has underperformed relative to the S&P 500. However, that’s less the case if the stock is owned as part of a covered option strategy. It is one that I have owned far too rarely over the years. It does have occasional drops and surges but tends to periodically find a new level of support. Over the past year $26 appears to be that level from which it may see moves higher or lower. While its premium isn’t as high as I would like to see, supplemented with a generous and growing dividend it can be attractive for those embracing boredom.

Of course, if you don’t want boredom, look no further than Best Buy (NYSE:BBY), Facebook (NASDAQ:FB) and LuLuLemon (NASDAQ:LULU).

Best Buy goes ex-dividend this week and has dropped nearly 10% since its earnings induced surge higher. What I like about its current price, despite it being substantially higher than it had been just 2 months ago is that it is finally back to that level from which it plunged a year ago, just as with Whole Foods.

While it carries risk of reversing more of those gains, as it has recently done, its combination of premium, that always reflects that risk and dividend, attenuates the risk. Best Buy, additionally, may be one of those logical beneficiaries of an increasingly empowered consumers, especially as it gets leaner and more aggressive in its pricing, as it successfully sheds its “showrooming” reputation.

Facebook has traded virtually unchanged over nearly the past 5 months, yet offers an option premium that anticipates risk. However, in 2 1/2 years as a publicly traded company and the recipient of a barrage of criticism, it has done nothing other than to consistently grow and create revenue sources. Once shares escaped the burden of the lock-up expirations they have been recognized for both growth potential and fundamentals.

While other high profile social media companies, such as Twitter (NYSE:TWTR) flounder in presenting a clear vision and clear leadership, Facebook fires on all cylinders and consistently proves that those who call it irrelevant have no clue about what people of all ages want.

LuLuLemon reports earnings this week and it is just another of those companies that has had unnecessary background drama that has weighed on the performance of its shares. I sit on a much more expensive lot of shares currently, having offset some of those paper losses with the periodic sale of puts.

While I’m anxious to close those shares, it’s hard to overlook the potential opportunity that may be available this week, as the option market anticipates a 10.1% price move this week and a 1% ROI can potentially be achieved if shares move less than 12.4% lower.

Finally, it has been a long time since I’ve thought about owning Riverbed Technology (NASDAQ:RVBD). The now beleaguered Jim Cramer introduced me to Riverbed Technology about 6 years ago and it became one of my favorite stocks for a covered option strategy, despite having no clue as to what it actually did or sold.

Years of going in and out of positions ended a year ago when it looked as if an independent Riverbed Technology had seen its final days, as a buyout seemed to be inevitable.

That buyout has dragged on and on and somehow Riverbed is still an independent entity that this past week had some very considerable option activity at the current expiration month, yet at a well out of the money strike price.

That got my attention, as I continued to watch shares over the past year, constantly wavering over the occasional ups and downs and wondering what was going on behind the scenes.

I’m no more clear on the behind the scenes activity, but am certainly intrigued about the possibility of a near term move for one reason or another. Certainly, that has associated risk, although it appears as if there is support at $17 and a position may be entered as either a covered call, if seeking premium and capital gains or through the sale of puts if just seeking premiums and perhaps a lower entry point for share purchase.

Traditional Stocks: Astra Zeneca, Campbell Soup, General Electric, The Gap, Whole Foods

Momentum: Facebook, Riverbed Technology

Double Dip Dividend: Best Buy (12/9)

Premiums Enhanced by Earnings: LuLuLemon (12/11 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.

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