Weekend Update – April 26, 2015


The question of how much longer this market rally can keep going is the same question that’s been asked ever since the last time the market had a 10% loss.

Actually even that time, way back in April 2102, it wasn’t quite a 10% loss. For that, you would have to go back to 2011.

But that’s splitting hairs.

I wish I would have known Michael Batnick, also know as “The Irrelevant Investor” on Twitter, back in those days.

He had the answer to that burning question that is every bit as applicable today as it was every time the market hit a new high over the past few years.

With each of those highs and the gap between corrections growing and growing, it reminded me of the fallacy of believing that after 8 straight spins of the roulette wheel falling on “red” the next spin just had to yield “black.”

The belief that “this time it’s going to be different” is frequently held by those who don’t get shamed even after having been already fooled twice.

Had I known Michael Batnick in 2011, 2012, 2013 or even 2014, he would have told me that it’s hard to make a bear case on the basis of the duration of any move, because the duration is never knowable.

Since I was one of those certain that the ninth spin would just have to fall on black, I’ve also been one of those waiting for a correction since having recovered from the one in 2012. Not only waiting, but convinced that with each and every week we were a week closer to that inevitable decline.

At least that logic wasn’t totally flawed, as we did get a week closer to everything. But mostly, what we’ve gotten closer to has been the next rally higher.

What do you say about a week that ends with the S&P 500 being 1.7% higher and closing at a new all time high, while at the same time the NASDAQ 100 closes at a 15 year high? Granted those S&P 500 highs have come fairly often and fairly regularly, so they don’t really mean very much, but for those that thought that the NASDAQ could never see 5000 again, a good case can be made for never giving up hope.

That’s why I never give up hope that there’s a correction coming.

NASDAQ has given me the strength.

This past week was one almost totally devoid of economic news. Instead, it was one fully dominated by earnings, as it was the first of the two most busy weeks of earnings reports every quarter.

The earnings pattern that has become clear is that revenues are down, but profits are up, especially if you focus on the “earnings per share” part of the report. The lesson to that may be that if you can’t grow your revenues simply find a strategy to shrink your share numbers.

Hashtag “buybacks.”

As long as revenues are lower as a result of the currency exchange issues that everyone has been expecting, the market has been kind. Surprisingly, however, the market has also been kind when companies have taken their guidance lower.

Next week, while still highly focused on earnings, two events within hours of one another may disrupt or enhance the party currently under way and take some attention away from earnings.

Just a few hours before an FOMC Statement release will be a GDP Report. Expectations are that the GDP report will be disappointing, particularly in light of earlier expectations for a consumer led surge in GDP. While disappointing GDP growth could quiet fears of an interest rate increase among those that are still hung up on that eventuality, it could also give FOMC doves another month to hold court.

Is that good news or bad news?

The longer the FOMC doves continue to influence monetary policy the more doubt there can be regarding the strength of economic recovery.

That can’t be good news.

Since it seems as if even bad news has been taken as good news for such a long time, it would seem natural to believe that sooner or later we would be due for some bad news to be finally taken as bad news.

You would think that sooner or later I would learn.

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

Among those not faring well this earnings season was General Motors (NYSE:GM), predominantly on disappointing foreign news that went beyond currency exchange. Following a boost in share price following
some quick activist intervention it has returned to a level that makes it more enticing to re-enter into a position.

Having spent only $400 million on its promised $5 billion in share buybacks through the first quarter, as part of its activist appeasement, there is at least something to keep share price artificially inflated as it also artificially inflates earnings per share.

What General Motors has offered amidst all of the uncertainty and bad news over the past year has been an attractive option premium and a good dividend that, thanks to the same activist, is now even better.

Ford Motor (NYSE:F) reports earnings this week and also goes ex-dividend.

I’m not terribly interested in taking earnings risk with Ford, but those earnings are reported the morning of the day before it goes ex-dividend. In the event of a downward move after earnings are released, I would be interested in buying shares if the move down strongly after earnings.

The options market is implying a move of only 3.5%. If it approaches or exceeds that to the downside, I might take that as an indication to buy shares, although I might consider using an extended weekly option, perhaps expiring May 8, 2015, rather than the weekly option that I would ordinarily use.

Also going ex-dividend this week and also having had a difficult time following its earnings release this week is Texas Instruments (NASDAQ:TXN).

In a market that suddenly seems to like “old tech,” what’s older than Texas Instruments? I can still remember buying the most rudimentary of calculators for about $150 more than 40 years ago and thinking that we had now seen everything.

What I didn’t think I would see was a nearly 8% decline on earnings last week. That leaves it still well above its yearly high, but may represent a good re-starting point, particularly as the dividend is at hand, as well. While semi-conductors may have had a hard go of things lately, if looking for a global correction in order to get a better entry point, you may be better served by settling for a more focused correction.

While I don’t like buying shares when they are near their yearly highs, Kinder Morgan (NYSE:KMI) may be an exception, particularly as it is ex-dividend this week.

In the world of energy related companies that have been under significant stress, Kinder Morgan has ironically been a breath of fresh air as it stores and transports combustible fuels for a nation that gets even more energy hungry as prices are dropping.

Cypress Semiconductor (NASDAQ:CY) is a company that I always like owning. Mostly it has been due to the admiration that I have for its CEO, TJ Rodgers, as long as he sticks to his CEO and incubator patron roles.

Occasionally he veers into other areas and then I have to remind myself that what I really admire is the ability to make money by investing in Cypress Semiconductor and that’s far more important than admiration or personal politics.

With its acquisition of Spansion being hailed by investors shares surged to a point that was well outside my comfort zone, but following a 20% decline in the past month, it is now at the upper level of that zone.

Cypress Semiconductor is often very volatile at earnings and this time will likely be no different. While I usually want to consider the sale of puts prior to earnings, in this case I would probably consider the purchase of shares, especially if they continue to move downward in the early part of the week and then consider a sale of June 2015 option contracts, rather than the May 2015 variety, thereby providing additional time for shares to recover if shares drop drastically.

Finally, I’ve been waiting for a chance to enter into a Twitter (NYSE:TWTR) position one way or another. In 2014 I had positions on 10 different occasionsand spent most of that time trying to avoid being assigned shares after having sold put contracts.

In hindsight, I don’t mind the very high maintenance that those positions required, however, the perception of Twitter has changed, as it seems to actually have a plan to monetize itself. More importantly it has the means and the people to execute on their strategies that continue to evolve.

Following a period of withering criticism of its leadership, the unequivocal show of support for its CEO, Dick Costolo by the Board as well as some Twitter founders, seemed to stem the tide of calls for his resignation.

That and earnings.

Following a large move higher after its last earnings report and then slowly migrating higher over the subsequent 3 months, the options market is implying an 11% move next week.

However, a 1% ROI may be possible if selling a weekly put contract even if shares fall by as much as 13.6%. If selling puts and faced with an adverse move beyond the range implied by the options market, my past experience with Twitter has shown that the options market is liquid enough to have a good chance of being able to roll over those puts if trying to avoid assignment and wait out the price cycle until it starts to show signs of recovery.

Alternatively, it has also offered a chance to assume ownership of shares and then generate income by selling calls, that always have premiums reflecting the underlying risk and volatility of the shares.

Traditional Stocks: General Motors

Momentum Stocks: none

Double Dip Dividend: Ford Motor (4/29), Kinder Morgan (4/28), Texas Instruments (4/28)

Premiums Enhanced by Earnings: Cypress Semiconductor (4/30 AM), Twitter (4/28 PM)

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.