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Weekend Update – October 12, 2014

As The Federal Reserve’s policy of “Quantitative Easing” comes to an end the next phase considered should perhaps be one of instituting some form of “Quantitative Muzzling.”

Given comments contained in this past week’s FOMC statement had recognized global economic concerns, perhaps the Federal Reserve should consider expanding its dual mandate and reaching across the ocean to affix, adjust and tighten the right remedy.

As most of us learned sometime in childhood, words have consequences. However, we tend not to mind when the consequences are positive for us or when what we all know is left unsaid and ignored.

In each of the past two weeks words from the European Central Bank’s President Mario Draghi have had adverse impacts on global markets. While no one is overtly suggesting that ECB President’s should be seen and not heard, undoubtedly at least one person is thinking that, having applied a sloppy test of correlation to the market’s moves and Draghi’s words.

Such sloppy tests may have at least as much validity as the much discussed “key reversal” seen as trading closed on Wednesday and said to presage a bullish turnaround to the downtrend.

How did that work out for most people?

This week Draghi told us what everyone knows to be the truth, but what no one wants to hear. He simply said that there can be no growth in the European economies without economic reform.

That’s not different from what he said the previous week, as he pointed out that political solutions were necessary to deal with economic woes.

We also all know if it we have to rely on politicians to do the right thing, or make the difficult decisions, we’re not going to fare terribly well, hence the sell-offs. Why the Europeans can’t simply kick things down the road and then forget about it is a question that needs to be asked.

Compare the response to Draghi’s comments to the absolutely effusive response to this past week’s FOMC statement that simply said nothing and ignored answering the question that everyone wanted to ignore.

Despite everyone knowing what Draghi has been saying to be true, having had the same scolding take place in the U.S. just two years ago, no one with an investment portfolio wants to hear of such a thing, especially when it’s followed up with downgrades of Finland’s and France’s credit ratings.

Add to the mix the International Monetary Fund’s cut to its global growth forecast and you have spoken volumes to an already wary US market that was now eagerly eying any breach of the 200 day S&P 500 moving average (dma), as that had taken the place of the “key reversal” in the hearts and minds of technicians and foisted upon investors as being the gateway to what awaits.

Unfortunately, the message being sent with that technical indicator is a bearish one. While it has been breached on numerous occasions in the past 5 years, the most pronounced and prolonged stay below the 200 dma came in the latter half of 2011, a period when triple digit daily moves were commonplace and volatility was more than double the now nearly 2 year high level.

I miss those days.

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

When I first started thinking about a theme for this week’s article I decided to focus on stocks that had already undergone their own personal 10% correction.

That list grew substantially by the time the week came to its close following a brief FOMC induced rally mid-week and that thesis was abandoned.

As trading in the coming week opens at a DJIA level lower than where it began the year, there’s not much reason to start the week with any sense of confidence.

While the S&P 500 is only 5.2% below its recent high, putting it on par with numerous “mini-corrections” over the past two years, you don’t have to do a quantitative assessment to know that this decline feels differently from the others, as volatility is at a two year high point. The sudden appearance of triple digit moves have now gone from the mundane 100 point variety and have added 200 and 300 point ones into the arsenal.

For me, this week may be a little different. Heading into the week I have less cash reserves than I would like and less confidence than I would ordinarily need to dwindle it down further.

While it appears as if there are so many values to be had I would prefer to see some sign of stability before committing resources in my usual buy/write manner. Instead, I may be more likely to add new positions through the sale of out of the money puts, unless there is a dividend involved.

Additionally, while individual stocks may have compelling reasons to consider their purchases, this week I’m less focused on those specific reasons rather than the nature of their recent price declines and the ability to capitalize on the heightened option premiums associated with their recent volatility.

One of the benefits of this rising volatility environment is that option premiums grow as does the uncertainty. The sale of puts and anticipation of the need to rollover those puts in the event of further price erosion may be better suited to an environment of continuing price declines, rather than utilizing a traditional buy/write strategy.

Furthermore, as the premiums become more and more attractive, I find myself more inclined to attempt to rollover positions that might otherwise be assigned, as the accumulation of premiums can offer significant downside protection and reduces the need to find alternative investment candidates.

If you’re looking for a sector that is screaming “correction” you really don’t have to look beyond the Energy Sector. Hearing so many analysts calling for continued
decline in oil prices may be reason enough to begin considering adding positions.

Over the years I’ve lost track of how many times I’ve owned Halliburton (HAL), but other than during the 2008-2009 market crash, the time of the Deepwater Horizon disaster and during the tumultuous market of 2011, there haven’t been such precipitous declines in its price, as it has just plunged below its own 200 dma.

Although Halliburton doesn’t report earnings until the following week, next week’s premiums are reflective of the volatility anticipated. For anyone considering this position through a buy/write one factor to keep in mind is that it will be imperative to rollover the contract if expiration looks likely. That is the case because earnings are reported on the following Monday morning before trading opens so there won’t be a chance to create a hedging position unless done the previous week.

I have been waiting for an opportunity to repurchase shares of Anadarko Petroleum (APC) ever since a bankruptcy judge approved a pollution related settlement, that was part of its years earlier purchase of Kerr-McGee. Like Halliburton, it is now trading below its 200 dma, but it doesn’t report earnings until a week after Halliburton. However, it also offers exceptionally high option premiums as the perceived risk remains heightened in anticipation of further sector weakness.

Owing to its drops the final two days of the previous week, Dow Chemical (DOW) is now also trading below its 200 dma. It, too, is demonstrating an option premium that is substantially higher than has been the case recently, although the risk appears to be considered less than that seen for both Halliburton and Anadarko. With the exception of having received an “outperform” rating those past two days, Dow Chemical appears to have just been caught up in the market’s downturn.

Fastenal (FAST) has traded below its 200 dma since its last earnings report in July 2014 and was not helped by its latest report this past Friday. That was the case despite generally good revenues, but with softer margins that were expected to continue. Unlike the preceding stocks the option premiums are not expanded in reflection of heightened risk. In the event that this position is initiated with a put sale that is likely to be assigned, I would consider taking possession of shares rather than rolling over the puts, as shares go ex-dividend during the November 2014 option cycle.

For a stock whose price hasn’t done very much, eBay (EBAY) has been getting lots and lots of attention and perhaps it is that attention which has prompted it to finally decide to do what so many have suggested, by releasing plans to spin off its PayPal unit. eBay reports earnings this week and is always a prospect to exhibit a sizeable move. It is currently trading below the point that consider the mid-point of the price range that I like to see when considering a new position. As with some other potential earnings trades, it is a candidate for out of the money put sales before earnings or for those more cautious the sale of puts after earnings in the event of a large price drop upon earnings having been released.

Intel (INTC) reports earnings this week after having already been brutalized this past week along with the rest of the chip sector. Most recently I discussed some hesitancy regarding a position in Intel because it had two price gaps higher in the past few months. However, thanks to the past week it has now erased one of those price gaps that represented additional risk. As with Fastenal there is an upcoming ex-dividend date that may be a consideration in any potential trade.

Following YUM Brands’ (YUM) earnings report last week, many over-reacted during after hours trading and shares quickly recovered to end the following day higher, perhaps buoyed by the enthusiasm following the FOMC Statement. Shares did trend lower the rest of the week, but fared much better than the overall market. This coming week YUM Brands is ex-dividend and based upon its option premium is a veritable sea of calm, although it too is demonstrating growth in premiums as risk is generally heightened.

Finally, Best Buy (BBY) is one of those stocks that has seen its own personal correction, having fallen nearly 13% since the market high just 3 weeks ago. With so much attention having been placed on European concerns it’s hard to think of too many stocks that are so well shielded from some of those perceived risks. Although it doesn’t report earnings for more than a month, this is a position that I would like to maintain for an extended period of time, particularly with its currently bloated option premiums, heading into earnings, which I believe will reflect an improving discretionary spending environment, to Best Buy’s benefit.

Unless of course the muzzle falls off, in which case all bets are off for this week.

Traditional Stocks: Anadarko Petroleum, Dow Chemical, Fastenal, Halliburton

Momentum: Best Buy

Double Dip Dividend: YUM Brands (10/15)

Premiums Enhanced by Earnings: eBay (10/15 AM), Intel (10/14 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.

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Weekend Update – October 5, 2014

This week’s markets didn’t respond so positively when Mario Draghi, the head of the European Central Bank failed to deliver on what many had been expecting for quite some time.

The financial markets wanted to hear Draghi follow through on his previous market moving rhetoric with an ECB version of Quantitative Easing, but it didn’t happen. After two years of waiting for some meaningful follow through to his assertion that “we will do whatever it takes” Draghi’s appearance as simply an empty suit becomes increasingly apparent and increasingly worrisome.

On a positive note, as befitting European styling, that suit is exquisitely tailored, but still hasn’t shown that it can stand up to pressure.

It also wasn’t the first time our expectations were dashed and no one was particularly pleased to hear Draghi place blame for the state of the various economies in the European Union at the feet of its politicians as John Chambers, the head of Standard and Poor’s Sovereign Debt Committee did some years earlier when lowering the debt rating of the United States.

Placing the blame on politicians also sends a message that the remedy must also come from politicians and that is something that tends to only occur at the precipice.

While the Biblical text referring to a young child leading a pack of wild animals is a forward looking assessment of an optimistic future, believing that an empty suit can lead a pack of self-interested politicians is an optimism perhaps less realistic than the original passage.

At least that’s what the markets believed.

Befitting the previous week’s volatility that was marked by triple digit moves in alternating fashion, Draghi’s induced 238 point decline was offset by Friday’s 208 point gain following the encouraging Employment Situation Report. Whereas the previous week’s DJIA saw a net decline of only 166 points on absolute daily moves of 810 points, this past week was more subdued. The DJIA lost only 103 points while the absolute daily changes were 519 points.

The end result of Friday’s advance was to return volatility to where it had ended last week, which was a disappointment, as you would like to see volatility rise if there has been a net decline in the broader market. Still, if you’re selling options, that level is better than it was two weeks ago.

While Friday’s gain was encouraging it is a little less so when realizing that such memorable gains are very often found during market downtrends. There is at least very little doubt that the market behavior during the past two weeks represents some qualitative difference in its behavior and an isolated move higher may not be very reflective of any developing trend, but rather reactive to a different developing trend.

As with Draghi, falling for the rhetoric of such a positive response to the Employment Situation Report, may lead to some disappointment.

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

Many of the positions being considered this week are recently highlighted positions made more appealing following recent price pullbacks rather than on any company specific factors. Of course, when looking at stocks whose price has recently fallen at some point the question regarding value versus “value trap” has to be entertained.

With some increase in volatility, despite the rollback this week, I’ve taken opportunity to rollover existing positions to forward weeks when expanded option contracts have been available. As those premiums have increased a bit being able to do so helps to reduce the risk of having so many positions expire concurrently and being all exposed to a short term and sudden price decline.

Just imagine how different the outcome for the week may have been if Thursday’s and Friday’s results were reversed if you were relying on the ability to rollover positions or have them assigned.

However, with the start of earnings season this week there’s reason to be a little more attentive when selecting positions and their contract expiration dates as earnings may play a role in the premiums. While certainly making those premiums more enticing it also increases the risk of ownership at a time when the relative market risk may outweigh the reward.

One stock not reporting earnings this week, but still having an enriched option premium is The Gap (GPS). It opens the week for trading on its ex-dividend date and later in the week is expected to announce its monthly same store sales, being one of the few remaining companies to do so. Those results are inexplicably confusing month to month and shares tend to make strong price movements, frequently in alternating directions from month to month. For that uncertainty comes a very attractive option premium for shares that despite that event driven volatility tend to trade in a fairly well defined range over the longer term.

When it comes to their fashion offerings you may be ambivalent, but when it comes to that kind of price movement and predictability, what’s not to like?

If you’re waiting for a traditional correction, one that requires a 10% pullback, look no farther than Mosaic (MOS). While it had been valiantly struggling to surpass the $50 level on its long road to recovery from the shock of the break-up of the potash cartel, it has now fallen about 13% in 5 weeks. Most recently Mosaic announced a cutback in phosphate production and lowered its guidance and when a market is already on edge it doesn’t need successive blows like those offered by Mosaic as it approaches its 52 week low.

Can shares offer further disappointment when it reports earnings at the end of this month? Perhaps, but for those with a longer term outlook, at this level shares may be repeating the opportunity they offered upon hitting their lows on the cartel’s dissolution for serial purchase and assignment, while offering a premium enhanced by uncertainty.

Seagate Technology (STX) is also officially in that correctio
n camp, having dropped 10% in that same 5 week period. It has done so in the absence of any meaningful news other than perhaps the weight of its own share price, with its decline having come directly from its 52 week high point.

For a company that has become fairly staid, Pfizer (PFE) has been moving about quite a bit lately. Whether in the news for having sought a tax inversion opportunity or other acquisitions, it is clearly a company that is in need of some sort of catalyst. That continuing kind of movement back and forth has been pronounced very recently and should begin making its option premium increasingly enticing. With shares seemingly seeking a $30 home, regardless of which side it is currently on and an always attractive dividend, Pfizer may start getting more and more interesting, particularly in an otherwise labile market.

Dow Chemical (DOW) is one of those stocks that used to be a main stay of my investing. It’s price climb from the $40 to $50 range made it less so, but with the realization that the $50 level may be the new normal, especially with activist investor pressure, it is again on the radar screen, That’s especially true after this week’s price drop. I had been targeting the $52.50 level having been most recently assigned at $53.50, but now it appears to be gift priced. Unfortunately, it may be a perfect example of that age old dilemma regarding value, having already greatly under-performed the market since its recent high the “value trap” part may have already been played out.

While MasterCard (MA) is ex-dividend this week, it is certainly not one to chase in order to capture its dividend. With a payout ratio far below its competitors it would seem that an increase might be warranted. However, what makes MasterCard attractive is that it has seemingly found a trading range and is now situated at about the mid-point of that range. While there is some recent tumult in the world of payments and with some continuing uncertainty regarding its presence in Russia, MasterCard continues to be worth consideration, particularly as it too has significantly under-performed the S&P 500 in the past two weeks.

Equal in its under-performance to MasterCard during that period has been Texas Instruments (TXN). I’ve been eager to add some technology sector positions for a while and haven’t done so as often as necessary to develop some better diversification. Along with Intel (INTC) which I considered last week, as well, Texas Instruments is back to a price level that has my attention. Like Intel, it reports earnings soon and also goes ex-dividend during the October 2014 option cycle. Unlike Intel, however, Texas Instruments doesn’t have a couple of gap ups in price over the past three months that may represent some additional earnings related risk.

When it comes to under-performance it is possible that Coach (COH) may soon qualify as being synonymous with that designation. Not too surprisingly its past performance in the past two weeks, while below that of the S&P 500 may be more directly tied to an improved price performance seen in its competitor for investor interest, Michael Kors (KORS). However, Coach seems to have established support at its current level and may offer a similar opportunity for serial purchase and assignment as had been previously offered by Mosaic shares.

Finally, with the exception of YUM Brands (YUM) all of the other stocks highlighted this week have under-performed the S&P 500 since hitting its recent high on September 18, 2014. YUM Brands reports earnings this week and is often very volatile when it does so. This time, hover, the options market doesn’t seem to be expecting a very large move, only about 4.5%. Neither is there an opportunity to achieve a 1% ROI through the sale of a put option at a strike outside of the range implied. However, YUM Brands is one of those stocks, that if I had sold puts upon, I wouldn’t mind owning if there was a likelihood of assignment.

So often YUM Brands share price is held hostage to food safety issues in China and so often it successfully is able to  see its share price regain sudden losses. That, however, hasn’t been the case thus far since it’s summertime loss. There are probably little expectations for an upside surprise upon release of earnings and as such there may be some limited downside, perhaps explaining the option market’s subdued pricing.

If facing assignment of puts being sold with an upcoming ex-dividend date the following week, I would be inclined to accept assignment and proceed from the point of ownership rather than trying to continue avoiding ownership of shares. However, with the slightest indication of political unrest spreading from Hong Kong to the Chinese mainland that may be a decision destined for regret, just like the purchase of an ill-fitting and overly priced suit.

Traditional Stocks: Dow Chemical, Pfizer, Texas Instruments, The Gap

Momentum: Coach, Mosaic, Seagate Technology

Double Dip Dividend:  MasterCard (10/7)

Premiums Enhanced by Earnings: YUM Brands (10/7 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.

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Weekend Update – September 14, 2014

Two weeks ago the factors that normally move markets were completely irrelevant. Instead, investors focused much of their attention on the tragic story that ended with the passing of Joan Rivers, while allowing the market to go on auto-pilot.

The fact that economic and geo-political news was ignored during that week wasn’t really much of a concern as markets went on to secure their fifth straight weekly gain.

This past week was essentially another one where the the typical kind of news we look to was irrelevant, at least as far as gaining our attention. This week most of our efforts focused on the unfortunate story of a talented, but abusive football player and the introduction of new products from Apple (AAPL).

There was a time, not so very long ago, when that football player was considered a soft spoken role model. In fact, somewhere is a photo of my wife, in a Baltimore Ravens jersey, and he at a charitable event, one of many that he attended and supported.

Amazingly, as the home Baltimore Ravens played their game on Thursday night, there were reportedly many female fans wearing the jersey of that abusive player, even though there were plenty of offers and incentives to exchange such jerseys in for pizza, drinks and other items.

The memory of the past is apparently more relevant than the reality of the present, sometimes.

There was a time, also not so very long ago, that Apple’s fate was the same as the fate of the markets, except that when Apple went higher, the market lagged and when Apple went lower, the market outpaced in the decline. Now, its ability to lead is less evident and so its place in the week’s news was mostly as a products release event, rather than as a marking moving event.

Those days of past are now irrelevant and Apple’s reality is tied and the market routinely part ways.

Unfortunately, that football player’s brutish actions made the new iPhone 6’s planned publicity campaign appear to be ill-conceived. Equally unfortunate was that this past week’s irrelevancies weren’t sufficient to allow markets to return to auto-pilot and instead snapped that weekly winning streak, as fears of liquidity may have captured investor’s attention.

Weeks filled with irrelevancy are likely to come to an end as the coming week is filled with lots of challenges that could easily build upon the relatively mild losses that broke that successive streak of weekly gains.

In the coming week there is an FOMC statement release as well as the Chairman’s press conference. Many are expecting some change in wording in the FOMC statement that would indicate a willingness to commence interest rate increases sooner than originally envisioned. That could have an adverse impact on equity markets as a drying up of liquidity could result.

Perhaps even more of a impetus for decreased liquidity is the planned Ali Baba (BABA) IPO. Likely to be the largest ever for US markets, the money to pay for those shares has to be coming from someplace and could perhaps have contributed to this week’s preponderance of selling. It’s not too likely that a lot of money will be coming off the sidelines for these share purchases, so it’s reasonable to expect that funds have been and will be diverted.

Unfortunately, the IPO comes at the end of the week, so I don’t expect much in the way of discretionary spending to buy markets before that, unless some nice surprise in the way the FOMC’s statement is interpreted.

Let’s not also forget this week’s referendum on Scotland’s independence. No one knows what to expect and a nervous market doesn’t like surprises, nor sudden adverse shifts in currency rates.

It’s hard to know whether these events will be more relevant than some of the irrelevancies of preceding weeks, but they certainly represent upcoming challenges.

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

This is a week that I don’t have too much interest in earnings or in “momentum” kind of stocks, unless there’s also a dividend involved in the equation. Having watched some well known and regarded companies take their knocks during this past week, yet fully aware that the market is not even 2% below its recent high level, there’s not too much reason to be looking for risk.

As volatility rises concurrent with the market dropping, the option premiums themselves should show evidence of the perceived increased risk and can once again make even the most staid of stocks start looking appealing.

With my personal cash reserves at lower levels than I would like, I’m not eager to make many new purchases this week, despite what appear to be some relative bargains.

While the market was broadly weak I was fortunate in having a few positions assigned and may be anxious to re-purchase those very same positions at any sign of weakness or even if they stay near their Friday closing prices.

Those stocks were British Petroleum (BP), T-Mobile (TMUS) and Walgreen (WAG). Although they’re not included in this week’s listing, they may be among the first potential purchases that I look toward completing and may be satisfied being an onlooker for the rest of the week.

Among other stocks that may warrant some interest are those that have under-performed the S&P 500 since the beginning of the summer, a completely arbitrary measure that I have been using for the past few weeks, particularly during the phase of the market’s continuing climb.

^SPX ChartGeneral Electric (GE) is
one of those staid stocks whose option premiums of late have been extraordinarily low. It goes ex-dividend this week and is starting to look a little bit more inviting. Having now spun off some of its financial assets and made preparations to sell its appliances divisions to my old bosses at Electrolux (ELUXY), General Electric is slowly refocusing itself and while not having looked as a stellar performer, it has greatly out-paced the S&P 500 since the bottom of the financial crisis in 2009. In hindsight it is a position that I’ve owned far too infrequently over those years.

Dow Chemical (DOW) and DuPont (DD) have both lagged the S&P 500 over the past two months, much of it having come in the past week. Those drops have brought shares back to levels that I would entertain share re-purchases.

The option premium pricing may indicate some greater risk in Dow Chemical, however both companies have some activists interests that may help to somewhat offset any longer term pressures.

I’ve been waiting for Verizon (VZ) shares to drop for a while and while it has done so in the past week, it’s still not down to the $47.50 level that I my eyes on. However, its current level may offer sufficient attraction to re-enter a position in advance of its upcoming, and increased dividend.

Without a doubt the mobile telephone sector has been an active one of late and I suspect that T-Mobile’s very aggressive strategy to acquire customers will soon show up in everyone’s bottom line and not in the way most would like. However, with strong price support at $45, a combination of option premiums and dividends could help ownership of Verizon shares offset those pressures while awaiting assignment of shares.

While Intel (INTC) hasn’t followed the pattern of the preceding selections and has performed well since the beginning of summer, it did give back enough ground in the past week to return to a level that interests me. On the downside is the credible assertion that perhaps shares of Intel have accelerated too much in the past few months and can be an easy target for any profit taking. WHile that may certainly be true, by all appearances the once moribund Intel has new life and I suspect will be reflected in earnings, should the goal of short term ownership turn into something longer.

As with Verizon, and hopefully General Electric, as its option premiums could still stand to improve, the combination of a strong dividend yield and option premiums can be helpful in waiting out any unexpectedly large and sudden price declines.

Given the mediocrity of performance by eBay (EBAY) over the past couple of years, it may be hard for anyone to find much relevance in the company, except for that potential jewel, PayPal. I purchased more shares last week and did expect that there might be some downside pressure if Apple announced a new payment system, as had been widely expected. Moving higher into the upcoming Apple event shares did go strikingly lower once details of “Apple Pay” became known. The use, however, of an expanded weekly option provided a rich premium related to the uncertainty surrounding the Apple event and time to dig out of any hole.

The bounce back came sooner than expected as some rumors regarding Google’s (GOOG) interest in eBay made their rounds. Whether valid or not, there’s not too much question that the pressure to consider a spin off of the PayPal unit is ramping up and may, in fact, be seen as necessary by eBay if it perceives any erosion on PayPal’s value as a result of a successful Apple Pay launch. In such a case, it’s far better to spin off that asset while it is still in its ascendancy, rather than to await some evidence of erosion. That is known as the “take the money and run” strategy and may serve eBay’s interests well, despite earlier assertions that PayPal functioned best and provided greatest value as an eBay subsidiary division.

While Visa (V) has announced its alignment with Apple, MasterCard (MA) always seems to be somewhat left out or at least not in a proactive position in the changing payments landscape. Yet even while it has ceded much of the debit card arena to Visa, it continues to be a very steady performer trading in a reasonably narrow range and offering an equally reasonable premium for the risk of owning shares. While selling those options also gives up the potential for upside share appreciation, that upside potential has been limited since the stock split. Much in the way as with eBay, the consideration of a covered option trade may be warranted and a means to generate returns from a position that has little net movement.

Las Vegas Sands (LVS) is the lone momentum stock for the week and it has a dividend this week that warrants some consideration. Having been brutalized in the last few weeks as the gaming sector, particularly those with interests in Macao have seen significant price erosion it appears to be developing some support in the $62.50 level. While I wish I knew that with certainty, what I do know with some degree of confidence is that when Las Vegas Sands does find that level of support it has consistently been a very good covered options position.

Finally, I jumped the gun with one of this week’s selections, having purchased shares of Cypress Semiconductor (CY) on Friday afternoon. I particularly like this company for non-investing reasons because it has been a fertile breeding ground for innovation in an number of different areas. However, by the same token, the same broad thinking that allows it to serve as an incubator also has its CEO spend too much time in the spotlight on policy related issues, when all I really want is for its share price to grow and to return to profitability.

In this case I was eager to purchase shares again in anticipation of its upcoming dividend early in the October 2014 option cycle. However, I also wouldn’t mind early assignment, having sold a deep in the money option. EIther way, the prospects of a satisfactory return look good, as even if not assigned early, there is a potential ROI of 2.5% even if shares fall nearly 5% from the purchase price.

The one caveat, if you find such things to be relevant, is that earnings will be released just two days before the end of the October cycle so there may be reason to consider rolling this forward at that point that the November 2014 options are available for sale.

Of course, all relevancy is in the eye of the
beholder and sometimes it is nice to not have any weighty issues to consider. After this coming week we may find ourselves wishing for those mindless days glued to “Access Hollywood” rather than the stock ticker.

Traditional Stocks: Cypress Semiconductor, Dow Chemical, DuPont, eBay, Intel, MasterCard, Verizon

Momentum: none

Double Dip Dividend: General Electric (9/18), Las Vegas Sands (9/18)

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 – July 6, 2014

You never really know what kind of surprises the market will bring on any given day. I’ve long given up trying to use rational thought processes to try and divine what is going to happen on any given day. It’s far too humbling of an experience to continually make such attempts.

Uncertainty may be compounded a little when we all know that low trading volume has a way of exaggerating things. With an extra long holiday coming up and many traders likely to be heading up to the Hamptons to really begin the summer, a three and half day trading week wasn’t the sort of thing that was going to generate lots of trading frenzy, although it could easily create lots of excitement and moves.

So when two big events occur in such a short time span, both of which seem to inspire optimism, as long as you’re not a bond holder, you can guess a plausible outcome. That’s especially so because lately the market hasn’t been in a "good/bad news is bad/good news" kind of mentality

In what was described as "the most significant speech yet in her still young Federal Reserve Chairmanship," Yellen re-affirmed he commitment to keep interest rates at low levels even in the face of bubbles. She made it clear that in her opinion higher interest rates was not the answer to dealing with financial excesses.

If you happen to be someone who invests in stocks, rather than bonds, could you be given any better gift, other than perhaps the same gift that Yellen gave just two weeks earlier during her post – FOMC press conference?

That gift didn’t have too much staying power and it’s unclear whether a few days off in celebration of Independence Day will makes us forget the most recent gift, but it’s good to have important friends who are either directly or indirectly looking out for your financial well-being.

When seeking to try and understand why stocks continue to perform so well, one concept that is repeatedly mentioned is that it is simply the best of alternatives at the moment. If you believe that to be the case, you certainly believe it even more after this week, especially when realizing that interest rates are likely to remain low even in the face of inflationary pressures.

Borrowing from an alternate investment class credo, it seems clear that the strategy should be simply stated as "Stocks, stocks, stocks."

As if there were any doubts about that belief, the following day came the release of the monthly Employment Situation Report and it lived up to and exceeded expectations.

So it appears that despite a significant revision of GDP indicating a horrible slowdown in the first quarter, the nation’s employers just keep hiring and the unemployment rate is now down to its lowest point since September 2008, which wasn’t a very good time if you were an equity investor.

While the "U-6 Unemployment Rate," which is sometimes referred to as the "real unemployment rate" is almost double that of the more commonly reported U-3, no one seems to care about that version of reality. As in "Animal House," when you’re on a roll you go with it.

More people working should translate into more discretionary spending, more tax revenues and less government spending on social and entitlement programs. That all sounds great for stocks unless you buy into the notion that such events were long ago discounted by a forward looking market.

However, normally that sort of economic growth and heat should start the process of worrying  about a rising interest rate environment, but that seems to be off the table for the near future.

Thank you, Janet Yellen.

Of course, with the market propelling itself beyond the 17000 level for the first time and closing the week on strength, what now seems like an age old problem just keeps persisting. That is, where do you find stock bargains?

I’m afraid the answer is that "you don’t," other than perhaps in hindsight.

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

Among my many faults are that I tend to be optimistic.

I don’t say that as many job applicants do in trying to turn the question about their greatest weakness into a strength in an effort to blow smoke in their prospective employer’s face.

That optimism, however, is more of a long term trait, as I’m always pessimistic in the short term. That seems consistent with someone who sells calls, especially of the short term variety. However, part of the problem is that my optimism often means that I purchase stocks too early on the heels of either bad news or performance in the belief that resurrection is at hand.

Most recently Coach (COH) has been a great example of that inappropriate optimism. Having owned shares 20 times in less than two years those purchases have frequently been made following earnings related disappointments and up until the most recent such disappointment, I haven’t found myself displaying a similar emotion. I’ve usually been pretty happy about the decision to enter into positions, although, in hindsight they were frequently initiated too early and I could have avoided some gastric erosion.

However, this time has been different in that even after an initially large price drop, the kind that in the past would have rebounded, shares just kept going lower. But also different is that the bad news didn’t end with earnings this time around.

As with another recent recommendation, Whole Foods (WFM), I believe that meaningful support has been displayed and now begins the time to start whittling down the paper losses through the addition of shares  or opening a new position. Despite what will certainly be years of ongoing competition with Michael Kors (KORS) and others in vying for the customer loyalty, Coach has dumped lots of bad news into a single quarter and is poised to begin its rebound along with a recovering retail sector.

While not  in retail, Mosaic (MOS) is another company that I’ve spent a year trying to whittle down the paper losses following dissolution of the potash cartel that no one ever knew had existed. In that time nine additional rounds of ownership have wiped out the losses, so now it’s time to  make some money. 

Shares have had some difficulty at the $50 level and recently have again fallen below. As with Coach, dividends and option premiums make it easier to exercise some patience, but they also can make it a compelling reason to initiate or add to positions. If adding at this level I would be very happy to see shares continue to trade in its narrow range and wouldn’t mind the opportunity to continually rollover option contracts as has been the case in the past, helping to erase large paper losses.

Also similar to Coach, in that I believe that all of the bad news and investor disbelief has been exhausted, is Darden Restaurants (DRI). There’s probably not much need to re-hash some of the dysfunction and what appears to be pure self-interest on the part of its CEO that has helped to keep its assets undervalued. However, at its current level I believe that there is room for share appreciation and a good time to start a position is often in advance of its ex-dividend date and nearly 5% dividend. 

While Darden’s payout ratio is well above the average for S&P 500 stocks, there isn’t much concern about its ability to maintain the payouts. With only monthly options available and a reporting earnings late in the upcoming season, I would consider the use of August 2014 options, rather than the more near term monthly cycle.

Also only offering monthly options, Transocean (RIG) has been slowly building off of its recent lows, but is having difficulty breaking through the $45 level. With recent pressure on refiners as a result of a Department of Commerce decision regarding exports there may be reason to believe that there would be additional incentive to bring supply to market for export. While clearly a long term process there may be advantage to being an early believer. Transocean, which I have now owned 14 times in two years also offers a very generous dividend.

As long as in the process of tabulating the number of individual rounds of ownership, Dow Chemical (DOW) comes to mind, with 18 such positions over the past two years. The most recent was added just a few weeks ago in order to capture its dividend, but shares then went down in sympathy with DuPont (DD) as it delivered some unexpectedly bad news regarding its seed sales. Showing some recovery to close the week, Dow Chemical is an example of a stock that simply needs to have  are-set of expectations in terms of what may represent a fair price. Sometimes waiting for shares to return to your notions of fairness may be an exercise in futility. While still high in my estimation based on past experience, I continue to look at shares as a relatively safe way to generate option income, dividends and share profits.

Microsoft (MSFT) is another obvious example of one of the many stocks that are at or near their highs. In that kind of universe you either have to adjust your baselines or look for those least susceptible to systemic failure. That is, of course, in the assumption that you have to be an active participant in the first place.

Since I believe that some portion of the portfolio always has to be actively participating, it’s clear that the baseline has to be raised. Currently woefully under-invested in technology, Microsoft appears to at least have relative immunity to the kind of systemic failure that should never be fully dismissed. It too offers that nice combination of option premiums and dividend to offset any potential short term disappointment.

Family Dollar Stores (FDO) reports earnings this week and must be getting tired of always being referred to as the weakest of the dollar stores. It may also already be tired of being in the cross hairs of Carl Icahn, but investors likely have no complaint regarding the immediate and substantial boost in share price when Icahn announced his stake in the company.

Shares saw some weakness as the previous week the potential buyout suitor, Dollar General (DG), considered to be the best in the class, saw its CEO announce his impending 2015 retirement. That was immediately interpreted as a delay in any buyout, at the very least and shares of both companies tumbled. While that presented an opportunity to purchase Dollar General, Family Dollar Stores are still a bit off of their Icahn induced highs of just a few weeks ago and is now facing earnings this coming week.

The option market is implying a relatively small 4.4% price move and it doesn’t quite fulfill my objective of tring to identify a position offering a weekly 1% return for a strike level outside of the implied price range. In this case, however, I would be more inclined to consider a sale of puts after earnings if the response to the report drives shares down sharply. While that may lead to susceptibility of repeating the recent experience with Coach, Carl Icahn, like Janet Yellen is a good friend to have on your side.

Finally, among the topics of the past week were the question of corporate responsibility as it comes to divulging news of the changing health status of key individuals. With the news that Jamie Dimon, Chairman and CEO of JP Morgan Chase (JPM), had been diagnosed with curable throat cancer, the question was rekindled. Fortunately, however, Dimon spared us any supposition regarding the cause of his cancer, perhaps having learned from Michael Douglas that we may not want to know such details.

While hoping for a swift and full recovery many recall when Apple (AAPL) shares briefly plunged when news of Steve Jobs’ illness was finally made public in 2009 and he took a leave of absence, opening the door for Tim Cook’s second seat at the helm of the company.

JP Morgan’s shares went down sharply on the report of Dimon’s health news on a day that the financials did quite well. To his and JP Morgan’s credit, the news, which I believe should be divulged if substantive, should not have further impact unless it changes due to some unfortunate deterioration in Dimon’s health or unexpected change of leadership.

In advance of earnings in two weeks I think at its current price JP Morgan shares are reasonably priced and in a continuing low interest rate environment and with increased regulatory safeguards should be much more protected form its own self than in past years. WHether as a short term or longer term position, I think its shares should be considered as a cornerstone of portfolios, although I wish that I had owned it more often than I have, despite 18 ventures in the past two years.

Hopefully, with Jamie Dimon continuing at the helm and in good health there will be many more opportunities to do so and revel in the process with Janet Yellen providing all the party favors we’ll need.

 

Traditional Stocks: Dow Chemical, JP Morgan Chase, Microsoft, Transocean

Momentum: Coach, Mosaic

Double Dip Dividend: Darden

Premiums Enhanced by Earnings: Family Dollar Stores

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 – May 11, 2014

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

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

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

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 – April 27, 2014

“The Bear” is waking up.

Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.

As we prepare for the coming week the two bears may be very much related, at least if you believe in such things as “cause and effect.”

It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.

On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.

Whatever happened to not going home long on the brink of a weekend of uncertainty?

Since that time the increased tensions always seemed to come along on Fridays and this past was no different, except that on this particular Friday it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.

As often is the case these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprise, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.

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

With the prospects of some kind of uncomfortable beginning to the coming week there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating “tit for tat” that may occur if events in and around Ukraine and Russia deteriorate.

Bed Bath and Beyond (BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren’t inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter’s weather as an excuse for slumping sales, I’m not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls would be more subject to weather related issues than mall based, one stop shopping centers.

Having been to a number of other countries and having seen the high regard in which coffee is held, it’s not very likely that Keuring Green Mountain (GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I’m surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.

Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood before its explosive rise after the most recent earnings report.

Aetna (AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.

As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, “C’est la vie.” While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although it’s dividend is on the low side, Aetna is a company that I could envision as a long term core holding.

Dow Chemical (DOW) also reported earnings this past week and beat projections the old fashioned way. They cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical’s value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs the activist presence is potentially helpful in keeping shares trading within a range which entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer term holding.

I’m on the fence over Cypress Semiconductor (CY). I currently own shares and always like the idea of having some just as it trades near it strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I’m familiar with its increasingly vocal CEO.

This is another week replete with earnings. For those paying attention last week a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.

Among those reporting earnings this week are Herbalife (HLF), Twitter (TWTR) and Yelp (YELP).

There’s not much you can say about Herbalife, other than it may be the decade’s most unpredictable stock. Not so much in terms of revenues, but rather in terms of “is it felonious or isn’t it felonious?” With legal and regulatory issues looming ahead the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.

Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.

However, with its marked weakness in the latter part of the week I’m interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.

Yelp is among those also having suffered a large drop as the week’s trading came to its close. as with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.

For those that just can’t get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.

Finally, Intel (INTC) and Microsoft (MSFT) are part of what now everyone is affectionately referring to as “old tech.” A few months ago the same people were somewhat more derisive, but now “old tech” is everyone’s darling. Intel’s ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.

Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, bit also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to “get it” and leverage its great assets, recognizing that there may be some real gems beyond Windows.

Traditional Stocks: Momentum Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft

Momentum: Cypress Semiconductor, Keurig Green Mountain

Double Dip Dividend: Intel (ex-div 5/5)

Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 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.

Posted on

Weekend Update – December 8, 2013

Sometimes good things can go good.

Anyone who remembers the abysmal state of television during the turn of this century recalls the spate of shows that sought to shock our natural order and expectations by illustrating good things gone bad. There were dogs, girls, police officers and others. They appealed to viewers because human nature had expectations and somehow enjoyed having those expectations upended.

That aspect of human nature can be summed up as “it’s fun when it happens to other people.”

For those that loved that genre of television show, they would have loved the stock markets of the last few years, particularly since the introduction of Quantitative Easing. That’s when good news became bad and bad news became good. Our ways of looking at the world around us and all of our expectations became upended.

Like everyone else, I blame or credit Quantitative Easing for everything that has happened in the past few years, maybe even the continued death of Disco. Who knew that pumping so much money into anything could possibly be looked at in a negative way despite having possibly saved the free world’s economies? While many decried the policy, they loved the result, in a reflection of the purest of all human qualities – the ability to hate the sinner, but love the sin.

Then again, I suppose that stopping such a thing could only subsequently be considered to be good, but rational thought isn’t a hallmark of event and data driven investing.

With so many believing that all of the most recent gains in the market could only have occurred with Federal Reserve intervention, anything that threatens to reduce that intervention has been considered as adverse to the market’s short term performance. That means good news, such as job growth, has been interpreted as having negative consequences for markets, because it would slow the flow. Bad news simply meant that the punch bowl would continue to be replenished.

For the very briefest of periods, basically lasting during the time that it wasn’t clear who would be the successor to Ben Bernanke, the market treated news on its face value, perhaps believing that in a state of leadership limbo nothing would change to upset the party.

It had been a long time since good news resulted in a market responding appropriately and celebrating the good fortune by creating more fortunes. This past week started with that annoying habit of taking news and believing that only a child’s version of reverse psychology was appropriate in interpreting information, but the week ended with a more adult-like response, perhaps a signal that the market has come to peace with idea that tapering is going to occur and is ready to move forward on the merits of news rather than conjecture of mass behavior.

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).

Coming off a nearly 200 point advance on Friday what had initially looked like relative bargains were now pricey in comparison and at risk to retrace their advances.

While last week was one in which dividends were a primary source of my happiness, unfortunately this week is not likely to be the same. As in life where I just have to get by on my looks, this week I’ll have to get by on new purchases that hopefully don’t do anything stupid and have a reasonable likelihood of being assigned or having their calls rolled over to another point in the near future. The principle reason for that is that most of the stocks going ex-dividend this week that have some appeal for me only have monthly options available. Since I’m already overloaded on options expiring at the end of the this monthly cycle my interests are limited to those that have weekly options. With volatility and subsequently premiums so low, as much as I’d like to diversify by using expanded options, they don’t offer much solace in their forward week premiums.

While the energy sector may be a little bit of a mine field these days, particularly with Iran coming back on line, Williams Companies (WMB) fits the profile that I’ve been looking for and is especially appealing this week as it goes ex-dividend. Williams has been able to trade in a range, but takes regular visits to the limits of the range and often enough to keep its option premium respectable. With no real interest in longer term or macro-economic issues, I see Williams for what it has reliably been over the course of the past 16 months and 9 trades. Despite its current price being barely 6% higher than my average cost of shares, it has generated about 35% in premiums, dividends and share appreciation.

Another ex-dividend stock this week is Macys (M). Retail is another minefield of late, but Macys has not only been faring better than most of the rest, it has also just hit its year’s high this past week. Ordinarily that would send me in the opposite direction, particularly given the recent rise. With the critical holiday shopping season in full gear, some will have their hopes crushed, but someone has to be a winner. Macys has the generic appeal and non-descript vibe to welcome all comers. While I wouldn’t mind a quick dividend and option premium and then exit, it is a stock that I could live with for a longer time, if necessary.

Citibank (C) is no longer quite the minefield that it had been. It may be an example of a good stock, gone bad, now gone good again. When I look at its $50 price it reminds me of well known banking analysts Dick Bove, who called for Citibank to hold onto the $50 price as the financial meltdown was just heating up. Fast forward five years and Bove was absolutely correct, give or take a 1 to 10 reverse split.

But these days Citibank is back, albeit trading with more volat
ility than back in the old days. I’m under-invested in the financial sector, which didn’t fare well last week. If the contention that this is a market that corrects itself through its sector rotation, then this may be a time to consider loading up on financials, particularly as there are hints of interest rate rises. Citibank’s beta inserts some more excitement into the proposition, however.

Like many others, Dow Chemical (DOW) took its knocks last week before recovering much of its loss. Also like many that I am attracted toward, it has been trading in a price range and has been thwarted by attempts to break out of that range. Mindful of a market that is pushing against its highs, this is a stock that I don’t mind owning for longer than most other holdings, if necessary. The generous dividend helps the patient investor wait on the event of a price reversal. For those a little longer term oriented, Dow Chemical may also be a good addition for a portfolio that sells LEAPs.

Like all but one of this week’s selections, I have owned shares of International Paper (IP) on a number of occasions in the past year. While shares are now well off of their undeserved recent lows there is still ample upside opportunity and shares seemed to have created support at the $45 level. My preference, as with some other stocks on this week’s list is that a little of the past week’s late gains be retraced, but that’s not a necessary condition for re-purchasing International Paper.

Baxter International (BAX) has been also in a trading range of late having been boxed in by worries related to competition in its hemophilia product lines to concerns over the impact of the Affordable Care Act’s tax on medical devices. Also having recovered some of its past week’s losses it, too, is trading at the mid-point of its recent range and doesn’t appear to have any near term catalysts to see it break below its trading range. The availability of expanded options provide some greater flexibility when holding shares.

Joy Global (JOY) had been on an upswing of late but has subsequently given back about 5% from its recent high. It reports earnings this week and its implied price move is nearly 6%. However, its option pricing doesn’t offer premiums enhanced by earnings for any strike levels beyond that are beyond the implied move. While a frequent position, including having had shares assigned this past week, the risk/reward is not sufficient to purchase shares or sell puts prior to the earnings release. However, in the event hat shares do drop, I would consider purchasing shares if it trades below $52.50, as that has been a very comfortable place to initiate positions and sell calls.

LuLuLemon Athletica (LULU) on the other hand, has an implied move of about 8% and can potentially return 1.1% even if the stock falls nearly 9%. In this jittery market a 9% drop isn’t even attention getting, but a 20% drop , such as LuLuLemon experienced in June 2013 does get noticed. Its shares are certainly able to have out-sized moves, but it has already weathered quite a few challenges, ranging from product recalls, the announced resignation of its CEO and comments from its founder that may have insulted current and potential customers. I don’t expect a drop similar to that seen in December 2012, but can justify owning shares in the event of an earnings related drop.

Riverbed Technology (RVBD), long a favorite of mine, is generally a fairly staid company, as far as staying out of the news for items not related to its core business. It can often trade with some volatility, especially as it has a habit of providing less than sanguine guidance and the street hasn’t yet learned to ignore the pessimistic outlook, as RIverbed tends to report very much in line with expectations. Recently the world of activist investors knocked on Riverbed’s doors and they responded by enacting a “poison pill.” While I wouldn’t suggest considering adding shares solely on the basis of the prompting from activist investors, Riverbed has long offered a very enticing risk/reward proposition when selling covered calls or puts. It is one of the few positions that I sometimes consider a longer term option sale when purchasing shares or rolling over option contracts.

Finally, and this is certainly getting to be a broken record, but eBay (EBAY) has once again fulfilled prophecy by trading within the range that was used as an indictment of owning shares. For yet another week I had two differently priced lots of eBay shares assigned and am anxious to have the opportunity to re-purchase if they approach $52, or don’t get higher than $52.50. While there may be many reasons to not have much confidence in eBay to lead the market or to believe that its long term strategy is destined to crumble, sometimes it’s worthwhile having your vision restricted to the tip of your nose.

Traditional Stocks: Baxter International, Dow Chemical, eBay, International Paper

Momentum Stocks: Citibank, Riverbed Technology

Double Dip Dividend: Macys (ex-div 12/11), Williams Co (ex-div 12/11)

Premiums Enhanced by Earnings: Joy Global (12/11 AM), LuLuLemon Athletica (12/12 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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Weekend Update – December 1, 2013

We may be on the verge of the Eve of Inflection.

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you’ve been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn’t escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It’s not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is “laissez les bon temps rouler.”

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

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).

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week’s durable goods orders report didn’t necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don’t believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren’t appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical’s dividend offers some protection during a
market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share’s volatility.

Finally, it’s yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst’s cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That’s an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend: AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

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 – November 17, 2013

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

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).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleague
red Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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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Weekend Update – October 27, 2013

Watching Congressional testimony being given earlier this week by representatives of the various companies who were charged with the responsibility of assembling a functioning web site to coordinate enrollment in the Affordable Care Act it was clear that no one understood the concept of responsibility.

They did, however, understand the concept of blame and they all looked to the same place to assign that blame.

As a result there are increased calls for the firing or resignation of Kathleen Sebelius, Secretary of Health and Human Services. After all, she, in essence, is the CEO.

On the other hand, it was also a week that saw one billionaire, Bill Gross, the “Bond King” of PIMCO deign to give unsolicited advice to another billionaire, Carl Icahn, in how he should use his talents more responsibly. But then again, the latter made a big splash last week by trying to convince a future billionaire, Tim Cook, of the responsible way to deal with his $150 billion of cash on hand. Going hand in hand with a general desire to impart responsibility is the tendency to wag a finger.

Taking blame and accepting responsibility are essentially the same but both are in rare supply through all aspects of life.

This was an incredibly boring week, almost entirely devoid of news, other than for earnings reports and an outdated Employment Situation Report. The torrent of earnings reports were notable for some big misses, lots of lowered guidance and a range of excuses that made me wonder about the issue of corporate responsibility and how rarely there are cries for firings or resignations by the leaders of companies that fail to deliver as expected.

For me, corporate responsibility isn’t necessarily the touchy-feely kind or the environmentalist kind, but rather the responsibility to know how to grow revenues in a cost-efficient manner and then make business forecasts that reflect operations and the challenges faced externally. It is upon an implied sense of trust that individuals feel a certain degree of comfort or security investing assets in a company abiding by those tenets.

During earnings season it sometimes becomes clear that living up to that responsibility isn’t always the case. For many wishing to escape the blame the recent government shutdown has been a godsend and has already been cited as the reason for lowered guidance even when the business related connection is tenuous. Instead of cleaning up one’s own mess it’s far easier to lay blame.

For my money, the ideal CEO is Jamie Dimon, of JP Morgan Chase (JPM). Burdened with the legacy liabilities of Bear Stearns and others, in addition to rogue trading overseas, he just continues to run operations that generate increasing revenues and profits and still has the time to accept responsibility and blame for things never remotely under his watch. Of course, the feeling of being doubly punished as an investor, first by the losses and then by the fines may overwhelm any feelings of respect.

Even in cases of widely perceived mismanagement or lack of vision, the ultimate price is rarely borne by the one ultimately responsible. Instead, those good earnings in the absence of revenues came at the expense of those who generally shouldered little responsibility but assumed much of the blame. While Carl Icahn may not be able to make such a case with regard to Apple, the coziness of the boardroom is a perfect place to abdicate responsibility and shift blame.

Imagine how convenient it would be if the individual investor could pass blame and its attendant burdens to those wreaking havoc in management rather than having to shoulder that burden of someone else’s doing as they watch share prices fall.

Instead, I aspire to “Be Like Jamie,” and just move on, whether it is a recent plunge by Caterpillar (CAT) or any others endured over the years.

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).

Andrew Liveris, CEO of Dow Chemical (DOW) was everyone’s favorite prior to the banking meltdown and was a perennial guest on financial news shows. His star faded quickly when Dow Chemical fell to its lows during the financial crisis and calls for his ouster were rampant. Coincidentally, you didn’t see his ever-present face for quite a while. Those calls have halted, as Liveris has steadily delivered, having seen shares appreciate over 450% from the market lows, as compared to 157% for the S&P 500. Shares recently fell after earnings and is closing in to the level that I would consider a re-entry point. Now offering weekly option contracts, always appealing premiums and a good dividend, Dow Chemical has been a reliable stock for a covered option strategy portfolio and Andrew Liveris has had a reliable appearance schedule to match.

A company about to change leadership, Coach (COH) has been criticized and just about left for dead by most everyone. Coach reported earnings last week and for a short while I thought that the puts I had sold might get assigned or be poised for rollover. While shares recovered from their large drop, I was a little disappointed at the week ending rally, as I liked the idea of a $48 entry level. However, given its price history and response to the current level, I think that ownership is still warranted, even with that bounce. Like Dow Chemical, the introduction of weekly options and its premiums and dividend make it a very attractive stock in a covered call strategy. Unlike Dow Chemical, I believe its current price is much more attractive.

I’m not certain how to categorize the CEO of Herbalife (HLF). If allegations regarding the products and the business model prove to be true, he has been a pure genius in guiding share price so much higher. Of course, then there’s that nasty fact that the allegations turned out to be true.

Herbalife reports earnings this week and if you have the capacity for potential ownership the sale of out of the money puts can provide a 1.2% return even of shares fall 17%. The option market is implying a 10% move. That is the kind of differential that gets my attention and may warrant an investment, even if the jury is still out on some of the societal issues.

In the world of coffee, Dunkin Brands (DNKN) blamed K-Cups and guided toward the lower end of estimates. Investors didn’t care for that news, but they soon got over it. The category leader, Starbucks (SBUX) reports earnings this week. I still consider Howard Schultz’s post-disappointing earnings interview of 2012 one of the very best in addressing the issues at hand. But it’s not Starbucks that interests me this week. It’s Green Mountain Coffee Roasters (GMCR). Itself having had some questionable leadership, it restored some credibility with the appointment of its new CEO and strengthening its relationships with Starbucks. Shares have fallen about 25% in the past 6 weeks and while not reporting its own earnings this week may feel some of the reaction to those from Starbucks, particularly as Howard Schultz may characterize the nature of ongoing alliances. Green Mountain shares have returned to a level that I think the adventurous can begin expressing interest. I will most likely do so through the sale of puts, with a strike almost 5% out of the money being able to provide a 1.2% ROI. The caveat is that CEO Brian Kelley may soon have his own credibility tested as David Einhorn has added to his short position and has again claimed that there are K-cup sales discrepancies. Kelley did little to clear up the issue at a recent investor day meeting.

Baxter International (BAX) has held up reasonably well through all of the drama revolving around the medical device tax and the potential for competition in the hemophilia market by Biogen Idec (BIIB). WIth earnings out of the way and having approached its yearly low point I think that it is ready to resume a return to the $70 range and catching up to the S&P 500, which it began to trail in the past month when the issues of concern to investors began to take root.

MetLife (MET) has settled into a trading range over the past three months. For covered calls that is an ideal condition. It is one of those stocks that I had owned earlier at a much lower price and had assigned. Waiting for a return to what turned out to be irrationally low levels was itself irrational, so I capitulated and purchased shares at the higher level. In fact, four times in the past two months, yielding a far better return than if shares had simply been bought and held. Like a number of the companies covered this week it has that nice combination of weekly option contracts, appealing premiums and good dividends.

Riverbed Technology (RVBD) reports earnings this week, along with Seagate Technology (STX). Riverbed is a long time favorite of mine and has probably generated the greatest amount of premium income of all of my past holdings. However, it does require some excess stomach lining, especially as earnings are being released. I currently own two higher cost lots and uncharacteristically used a longer term call option on those shares locking in premium in the face of an earnings report. However, with recent price weakness I’m re-attracted to shares, particularly when a 3 week 1.7% ROI can be obtained even if shares fall by an additional 13%. In general, I especially like seeing price declines going into earnings, especially when considering the sale of puts just in advance of earnings. Riverbed Technology tends to have a history of large earnings moves, usually due to providing pessimistic guidance, as they typically report results very closely aligned with expectations.

Seagate Technology reports earnings fresh off the Western Digital (WDC) report. In a competitive world you might think that Western Digital’s good fortunes would come at the expense of Seagate, but in the past that hasn’t been the case, as the companies have traveled the same paths. With what may be some of the surprise removed from the equation, you can still derive a 1% ROI if Seagate shares fall less than 10% in the earnings aftermath through the sale of out of the money put contracts.

ConAgra (CAG) and Texas Instruments (TXN) both go ex-dividend this week. I think of them both as boring stocks, although Texas Instruments has performed nicely this year, while ConAgra has recently floundered. On the other hand, Texas Instruments is one of those companies that has fallen into the category of meeting earnings forecasts in the face of declining revenues by slashing worker numbers.

Other than the prospect of capturing their dividends I don’t have deeply rooted interest in their ownership, particularly if looking to limit my new purchases for the week. However, any opportunity to get a position of a dividend payment subsidized by an option buyer is always a situation that I’m w
illing to consider.

Finally, as this week’s allegation that NQ Mobile (NQ), a Chinese telecommunications company was engaged in “massive fraud” reminds us, there is always reason to still be circumspect of Chinese companies. While the short selling firm Muddy Waters has been both on and off the mark in the past with similar allegations against other companies they still get people’s attention. The risk of investing in companies with reliance on China carries its own risk. YUM Brands (YUM) has navigated that risk as well as any. With concern that avian flu may be an issue this year, that would certainly represent a justifiable shifting of blame in the event of reduced revenues. At its recent lower price levels YUM Brands appears inviting again, but may carry a little more risk than usual.

Traditional Stocks: Baxter International, Dow Chemical, MetLife

Momentum Stocks: Coach, Green Mountain Coffee Roasters, YUM Brands

Double Dip Dividend: ConAgra (ex-div 10/29), Texas Instruments (ex-div 10/29)

Premiums Enhanced by Earnings: Herbalife (10/28 PM), Riverbed Technology (10/28 PM), Seagate Technology (10/28 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.