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Weekend Update – November 20, 2016

You might be able to easily understand any reluctance that the FOMC has had in the past year or maybe even in the year ahead to raise interest rates.

To understand why those decision makers could be scarred, all you have to do is glance back to nearly a year ago.

At that time, after a 9 year period of not having had a single increase in interest rates, the FOMC did increase interest rates.

The data compelled them to do so, as the FOMC has professed to be data driven.

Presumably, they did more than just look in the rear view mirror, casting forward projections and interpreting what are sometimes conflicting pieces of the puzzle.

At the time, the conventional wisdom, no doubt guided somewhat by the FOMC’s own suggestions, was that the small increase was going to be the first and that we were likely to see a series of such increases in 2016.

Funny thing about that, though.

Data is not the same as a crystal ball. Data is backward looking and trends can stop on a dime, or if I were to factor in the future value of money based upon the increase in the 10 Year Treasury note ever since Election Day, considerably more than a dime.

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Weekend Update – September 25, 2016

The Talking Heads were really something.

I saw them and The Ramones in Cambridge.

Not at a concert, but at an album signing.

I picked up an album just to be able to get a close look at the members of both bands, mostly because one of the Ramones had a safety pin through his cheek and I thought that was pretty weirdly cool.

Then I promptly put the signed albums back into the rack.

Maybe it’s strange that so many years later one of the Ramones, maybe the one with the safety pin, would sing an homage to American capitalism and maybe a bit of an homage to one of its media symbols, “The Money Honey.”

But that was all almost 40 years ago and I never dreamed that those two groups would have been so influential. I never would have returned the signed albums back to the rack had I any clue that they would have been worth something some day.

In time, I came to especially like the Talking Heads, but never got as close as I did that one afternoon, instead having to settle on repeatedly melting the cassette tapes holding their songs.

“Burning Down the House,” “Once in a Lifetime” and so many more.

This coming week, right on the heels of the FOMC’s most recent statement release that kept investors in a celebratory mood, is going to be something of a Talking Feds festival.

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Weekend Update – September 18, 2016

 

Everyone has been there at one time or another in their lives.

Maybe several times a day.

There is rarely a shortage of things and events that don’t serve or conspire to make us crazy.

Recurring threats of a government shutdown; the 2016 Presidential campaign; the incompetence in the executive suites of Twitter (TWTR) and pumpkin flavored everything, for example.

I add the FOMC to that list.

Although his annual Twitter campaign against pumpkin flavored everything has yet to start this year, there is scant evidence that Marek Fuchs, a wonderful MarketWatch columnist, has actually gone crazy.

However, as opposed to the hyperbole that typically characterizes the situation when someone is claiming to be made “crazy,” traders may be actually manifesting something bordering on the insane as members of the Federal Reserve toy with the fragile flowers they are in real life.

The alternating messages that have come from those members, who at one time, not too long ago, were barely seen, much less heard, have unsettled traders as the clock is ticking away toward this coming week’s FOMC Statement release.

Couple their deeply seated. but questionably held opinions regarding the timing of an interest rate increase, with the continuing assertion that the FOMC will be “data dependent,” and a stream of conflicting data and if you are prone to be driven crazy, you will be driven crazy.

Or, at the very least, prone to run on sentences.

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Weekend Update – August 14, 2016

When the news came that Thursday’s close brought concurrent record closing highs in the three major stock indexes for the first time since 1999, it seemed pretty clear what the theme of the week’s article should be.

But as I thought about the idea of partying like it was 1999, what became clear to me was I had no idea of why anyone was in a partying kind of mood on Thursday as those records finally fell.

Ostensibly, the market was helped out by the 16% or so climbs experienced by the first of the major national retailers to report their most recent quarterly earnings.

Both Macy’s (M) and Kohls (KSS) surged higher, but there really wasn’t a shred of truly good news.

At least not the kind of news that would make anyone believe that a consumer led economy was beginning to finally wake up.

The market seemed to like the news that Macy’s was going to close 100 of its stores, while overlooking the 3.9% revenue decline in the comparable quarter of 2015.

In the case of Kohls the market completely ignored lowered full year guidance and focused on a better than expected quarter, also overlooking a 2% decline in comparable quarter revenue.

For those looking to some good retail news as validating the belief that the FOMC would have some basis to institute an interest rate increase in 2016, there should have been some disappointment.

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Weekend Update – June 26, 2016

 A week ago, the world was getting ready for what all the polls had been predicting.

Only those willing to book bets seemed to have a different opinion.

Polls indicated that Great Britain was going to vote to leave the European Union, but those willing to put their money where their mouths were, didn’t agree.

Then suddenly there was a shift, perhaps due to the tragic murder of a proponent of keeping the EU intact.

That shift was seen not only in the polls, but in markets.

Suddenly, everyone was of the belief that British voters would do the obviously right thing and vote with their economic health in mind, first and foremost.

The funny thing is that it’s pretty irrational to expect rational behavior.

In a real supreme measure of confidence, just look at the 5 day performance of the S&P 500 leading up to the vote.

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Weekend Update – June 19, 2016

About 25 years ago a character debuted on Saturday Night Live and the recurring joke was to try and guess the character’s gender.

The sketches typically had  red herrings and lots of mis-direction and the question of Pat’s gender was never answered.

Never a terribly popular character, someone had the fiscally irresponsible idea of making a feature film and Pat was never heard from again.

The guessing stopped.

Fast forward to 2016 and think of Pat as an FOMC member.

Over the past 2 months or so there has probably been lots of mis-direction coming from Federal Reserve Governors, perhaps as they floated trial balloons to see how interest rate action or inaction would be received by the stock market.

The health of the stock market is not really part of their mandate, but since so much of the nation’s wealth is very closely aligned with those markets, it may only be logical that the FOMC should at least have some passing interest in its health.

Who would have guessed 6 months ago when the first interest rate hike occurred that we would be at a point where that has thus far been the only one?

Who would have thought that in the transpiring 6 months nothing would have validated the December 2015 interest rate increase and that nothing but conflicting economic data would be forthcoming?

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All in all, if you think about the man made tragic events of the past week in Brussels, the very rational and calm manner in which world markets reacted was really re-assuring.

When we sometimes scratch our heads wondering whether the market will this time interpret good news as being bad or whether it will deem it good, you know that something is amiss.

It’s nice when clear and rational heads are in charge of things.

So often the way the market seems to react to events it’s not too easy to describe the action as having been rational and you really do have to wonder just who is running the place.

The same may be said for the Federal Reserve and its Governors.

It wasn’t always that way, though.

We always knew who was running the place.

While dictatorships may not be a good thing, sometimes a benevolent dictatorship isn’t the worst of all possible worlds.

There was a time that the individual members of the Federal Reserve and the FOMC kept their thoughts to themselves and knew how to behave in public and in private.

That is, up until about 11 years ago when newly appointed and now departed President of the Dallas Federal Reserve Bank, Richard Fisher, had made a comment regarding FOMC monetary tightening policy and was subsequently taken to the woodshed by Alan Greenspan.

That error in judgment, offering one’s opinion, wasn’t repeated again until the new Federal reserve Chairman, Ben Bernanke, ushered in an era of transparency, openness and the occasional dissenting vote.

At that time, Fisher didn’t even disagree with Federal reserve policy. He was simply giving his opinion on the timing left in an existing policy, or perhaps just disclosing what he knew to be the remaining time of that particular approach.

Still, that kind of behavior was unheard of and not terribly well tolerated.

Now, under Janet Yellen, it seems as if the various Governors are battling with one another over who gets the most air time and who can make the most noise.

Clearly, inmates can be intelligent people, but there may be a very good reason why they’re not running the show.

Why the market often latches onto the words of an FOMC inmate or one who’s not even in that inner circle, particularly when those words may run counter to the Chairman’s own recent words, is every bit of a mystery as why those words were uttered in the first place.

But that is where we seem to be at the moment as the crystal clear clarity that we’ve come to expect from the Federal Reserve is sounding more like the noises coming from the Tower of Babel.

And we all know how that worked out.

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

When there is so much confusion abounding, sometimes it makes some sense to get right back to basics.

There isn’t a much more basic approach to stocks than looking for safe and reliable dividend paying companies, especially when the waters are murky or choppy.

While I don’t disagree with those who point to the out-performance of the universe of dividend paying stocks to the universe of non-dividend paying stocks, I’m not a big fan of the dividend itself and it’s usually fruitless to argue the belief held by many that it is the dividend that makes the company a worthwhile investment that is prone to outperform others.

Ultimately you pay for that dividend by virtue of your share price having gone down the amount of the dividend and you may have to pay taxes as well, on that distribution.

What I do like about dividends is how some of that inherent decline in the share price may end up being subsidized by an option buyer and that can boost the return.

Most of the time, my preference would be to be able to get the premium from having sold the option, most often of weekly duration, and also to be able to collect the dividend.

What i especially like, although it doesn’t happen too often, is when a stock is ex-dividend on a Monday.

In such cases, if the option buyer is going to exercise his right to snatch those shares at a pre-determined price, he must do so no later than the previous Friday.

What I like to do with those Monday ex-dividend positions is to sell an extended weekly option and then I don’t really care too much if those shares get taken away from me early. 

That’s because the additional week’s premium offsets the loss of the dividend while being able to take the cash from the assignment to invest in some other position.

Maybe even an upcoming ex-dividend position.

While not every position that I’m considering in the coming week will be ex-dividend the following Monday, that does characterize most of the potential trades for the coming week.

To put them all of those into a single basket, Cisco (CSCO),  Comcast (CMCSA), Deere (DE) and JP Morgan Chase (JPM) are all ex-dividend next Monday.

They each have their own story to tell and since 2016 has been an incredibly quiet one for me in terms of adding new positions, there is virtually no chance that i will be adding all of them.

At the moment I do own shares of Cisco, but none of the other positions, all representing different sectors.

With everything else being equal, I’d probably be more inclined to consider adding shares to a sector in which I may be under-invested.

For me, that would be the finance sector, which has been embattled all year as the expected interest rate climbs haven’t materialized.

For many, the decision by JM Morgan’s Jamie Dimon to buy $26 million in his own shares was the impetus to turn the market around from its steep 2016 losses.

That turnaround started on February 11, 2016.

Those shares are still far from their 2016 high and sooner or later the inmates trading stocks and the inmates making policy will be right about the direction of interest rates.

I still hold somewhat of a grudge against Comcast when I was a consumer of its services. However, it would be the height of irrationality to ignore it for what it could contribute to my non-viewing or non-internet surfing well-being.

Once a disruptor in its own right, Comcast is working hard to remain at the cutting edge or itself be displaced as the competition and the various means of delivering content are getting more and more complex to understand.

That may be its saving grace.

When you get right down to it, nothing is as simple as having a box, your television and your computer. While there’s decidedly nothing simplistic about what Comcast is doing and where it envisions going, at some point consumers may get overwhelmed by the growth in disparate and unconnected systems and may again long for bringing it all back together under a single roof.

Even if it is and continues to be challenged, Comcast is a few dollars below some resistance and I would feel comfortable adding shares in advance of its ex-dividend date.

I haven’t owned shares of Deere for a long time, just as I haven’t owned shares of caterpillar (CAT). The two of those used to be mainstays of my portfolio, if not both at the same time, then at least alternating, often with a new purchase being initiated as an ex-dividend date was approaching.

What appeals to me about Deere at the moment is that it is a little bit off from its recent highs and only a bit higher than where it stood on February 11th.

But more importantly, this week, as with all of the other potential selections, there is a nice dividend and an equally nice option premium. That combination lends itself to any number of potential contract lengths and strike levels, depending on one’s horizon.

While I especially like the Monday ex-dividend date, this is a position that i might consider wanting to hold for a longer period of time in an effort to either reap additional option premiums or some capital gains from shares, in addition to premiums and the dividend.

While I do already own shares of Cisco and it has bounced back nicely in the past 6 weeks, I think that it, too, has some more upside potential, if only to get it back to some resistance about 5% higher from its current level.

Like most others mentioned this week, there is a generous dividend and a generous option premium that make any consideration worthwhile.

As with Deere, while the Monday ex-dividend date may lead to one specific strategy, there may also be some consideration of utilizing longer dated contracts and further out of the money strike prices in order to capitalize on some anticipated price appreciation.

By contrast, I own shares of both The Gap (GPS) and Dow Chemical (DOW).

There has been absolutely nothing good that has been said about The Gap in far too long of a time.

There was a time that The Gap could be counted upon to alternated its monthly same store sales between worse than expected and better than expected results. as a result The Gap’s shares would frequently bounce back and forth on a monthly basis and it had periodically enhanced option premiums to reflect those consistent moves.

Lately though, the news has always been disappointing and the direction of shares has been unilateral, that is, until February 11th.

There’s not too much of a likelihood that The Gap’s recent performance is related to oil prices or interest rates, but it is certainly long overdue for a sustained move higher.

At its current level, i wouldn’t mind shares staying in the same neighborhood for a while and building some support for another leg. In the meantime, at this level there is some opportunity to collect the dividend and some reasonably health premiums, as well.

Finally, just as last week, I think that there may be opportunity in Dow Chemical.

While it has unjustifiably been held hostage by falling oil prices for more than a year, it has performed admirably. The market reacted positively when the announcement was made of its fairly complex merger and subsequently planned uncoupling with DuPont (DD), although the favor was lost as the rest of the market sank.

I continue to believe that there is relatively little risk associated with shares in the event the proposed merger runs into obstacles, as shares are trading at pre-announcement levels.

That combination of dividends and option premiums keeps making Dow Chemical an appealing consideration even as lunatics may be running around elsewhere.

 

Traditional Stocks: none

Momentum Stocks: none

Double-Dip Dividend: Comcast (4/4 $0.27), CSCO (4/4 $0.26), Deere (3/29 $0.60), DOW (3/29 $0.46), GPS (4/4 $0.23), JPM (4/4 $0.44)

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. 

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Weekend Update – March 20, 2016

Best laid plans often have a way of working out other than expected.

On slow days I make it a point to go and sit in anyone’s waiting room, even without an appointment, just to read stale issues of business and news magazines.

Eventually I get up and leave and feel better about my track record.

Doing that tends to reinforce the belief that the “experts” called upon to predict what awaits in the future are invariably wrong, even as self tying sneakers depicted in “Back to the Future” may now become somewhat of a reality.

Sometimes it’s the timing that’s all wrong and sometimes it’s the concept.

Unless you put much stock in a prediction, such as converting all of your assets to gold in anticipation of yet another Doomsday, they tend to be forgotten unless a dusty magazine is picked up.

The plan to be awash in the one true and universal currency might have seemed like a good idea until coming to the realization that it’s hard to spread on a slice of bread, even if you actually had a slice of bread.

While you can’t be very certain about the accuracy of a “futurists” predictions, you can be very certain that no self-respecting expert on the future keeps a complete scorecard and most would probably be advocates of having physician’s offices regularly rotate their stock of reading materials.

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Weekend Update – March 6, 2016

Depending upon what kind of outlook you have in life, the word “limbo” can conjure up two very different pictures.

For some it can represent a theologically defined place of temporary internment for those sinners for whom redemption was still possible. 

In simple terms it may be thought of as a place between the punishing heat and torment of hell below and the divineness and comfort of heaven above.

Others may just see an image reminding them of a fun filled Caribbean night watching a limber individual dancing underneath and maybe dangerously close to a flaming bar that just keeps getting set lower and lower.

Both definitions of “limbo” require some significant balancing to get it just right.

For example, you don’t get entrance into the theologically defined “Limbo” if the preponderance of your sins are so grievous that you can’t find yourself having died in “the friendship of God.” Instead of hanging around and waiting for redemption, you get a one way ticket straight to the bottom floor.

It may take a certain balance of the quantity and quality of both the good and the bad acts that one has committed during their mortal period to determine whether they can ever have a chance to move forward and upward to approach the pearly gates of heaven.

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Weekend Update – February 7, 2016

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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.