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Weekend Update – February 15, 2015

You would think that when the market sets record closing highs on the S&P 500 that there would be lots of fireworks after the fact and maybe lots of excited anticipation before the fact.

But that really hasn’t been the case since 2007.

The “whoop whoop” sounds you may have heard coming from the floor of the NYSE had nothing to do with pitched fervor, but rather with traditional noise making at 3:33 PM on the Friday before a 3 day holiday.

The whooping noise was also in sharp contrast to the relative calm of the past week and it may have been that calm, or maybe the absence of anxiety, that allowed the market to add another 2% and set those record highs.

After a while you do get tired of always living on the edge and behaving in a hyper-caffeinated way in response to even the most benign of events.

Even back in 2007 as we were closing in on what we now realize was the high point for that year, there were so many records being set, seemingly day in and out, that it began to feel more like an entitlement rather than something special.

You whoop about something special. You don’t whoop about entitlements. There was no whooping on Friday at 4 PM. instead, it was a calm, matter of fact reaction to something we had never seen before. New highs are met with yawns and new heights aren’t as dizzying as they used to be, especially if you don’t look down.

When your senses get dulled it’s sometimes hard to see what’s going on around you, but there’s a difference between maintaining a sense of calm and having your senses dulled to the dangers of collateralized debt obligations or other evils of the era.

This calmness was good.

As opposed to those who refer to pullbacks from highs as being healthy, this calm character of this climb to a new high was what health is really all about. I feel good when my portfolio outperforms the market during a down week, but the end result is still a loss. When I really feel great is when out-performing during an up week.

Both may feel good, but only one is good in absolute terms. From my perspective, the only healthy market is one that is moving higher, but not doing so recklessly.

This week, was a continuation of a month that has characterized by calm events and an appropriate measure of acceptance of those events while moving to greater heights in a methodical way

While it may be good to not see some kind of unbridled buying fervor break out when records are reached, it does make you wonder why the same self control can’t be put on when things momentarily appear dire, as there have certainly been pl
enty of near vertical declines in the past few months that just a little calmness of mind could have avoided.

Coming from the most recent decline that ended in January 2015, the move higher has presented a circuitous path toward Friday’s new high close.

Instead of the straight line higher or the “V-shaped” recoveries that so many refer to, and that have characterized upward reversals in the past few months, this most recent reversal has been a stagger stepped one.

Rather than coming as a burst of unbridled excitement, the market has been taking the time to enjoy and digest the ride higher.

The climb was odd though when you consider that oil prices had been moving strongly higher, retail sales were disappointing, interest rates were climbing and currency troubles were plaguing US company profits. All these were happening as gold, long a proxy for the investor anxiety was gyrating with large moves.

But perhaps it was a sense of serenity and calm from overseas that offset those worrying events. Greece and the European Union appeared to be closer to an agreement on debt concerns and another Ukraine peace accord seemed likely.

The stock market simply decided that nothing could possibly happen to derail either of those potential agreements.

So there’s calmness, dulled senses and burying your head in the sand.

This week the calmness may have been secondary to some denial, but given the result, I’m all for denial, as long as it can keep reality away just a little longer.

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

What surprises me most, particularly considering a portfolio that doesn’t often hold very many DJIA positions, is that this week there are 5 DJIA members that may have reason for garnering attention.

It has been a bit more than two years since I last owned American Express (NYSE:AXP). Up until 2015, if you had looked at its performance in the time since I last owned it and happened to have also been in a vacuum at the time, it looked as if it had a pretty impressive ride.

That impression would have been upset if the vacuum was disrupted and you began to compare its performance to the S&P 500 and especially if comparing it to its rivals.

That ride got considerably more bumpy this past week as it will be losing a major co-branding partner, Costco (NASDAQ:COST) in 2016. While the possibility of that partnership coming to an end had been well known, the market’s reaction suggests that either it was ignored or calmness doesn’t reside when mediocre rewards programs are threatened with extinction.

But a 10% plunge seems drastic. The co-branding effort allowed American Express to dip its toes into the credit card business and deal with normal folks who don’t always pay their credit card charges in full, but do pay interest charges. Given the Costco shopper demographic that seemed like a nice middle ground for risk and reward that will be difficult to replace. However, American Express shares are now on sale, having reached 16 month lows and the excitement injects some life into its option premiums.

Intel (NASDAQ:INTC) recovered some of its losses since my last purchase, but not enough to make it within easy striking distance of an assignment.

While it was a great performer in 2014 it has badly trailed the S&P 500 in 2015. While it may be subject to currency crosswinds, nothing fundamental has changed in its story to warrant its most recent decline, particularly as “old tech” has had its respect restored.

While its option premium is not overly exciting enough to consider using out of the money options, there is enough reason to believe that there is some additional potential for price recovery left in its shares to consider not covering all new shares.

Coca Cola (NYSE:KO) continues to be derided and maybe for good reason as it needs something to both change its image of being out of touch with contemporary tastes and some diversification of its product lines.

The former isn’t likely to happen overnight, nor is any revenue related calamity expected to strike with suddeness, at least not before its next dividend, which is expected in the next few weeks. In the meantime, as with Intel, there may be some reason to believe that some price recovery may be part of the equation when deciding to sell calls on the position.

In the cases of DJIA components Johnson and Johnson (NYSE:JNJ) and General Electric (NYSE:GE) their upcoming ex-dividend dates this week add to their interest.

Johnson and Johnson, when reporting earnings last month was one of the first to remind us of the darkness associated with a strong US dollar and its shares are still lower, having trailed the S&P 500 by nearly 8% since earnings release on January 20th. Most of that decline, however, has come since the market began its turnaround once February started.

Uncharacteristically, Johnson and Johnson’s option premium has become attractive, even in
a week that has a significant dividend event. As with its fellow DJIA members, Intel and Coca Cola, I would consider some possibility of trying to also capitalize on share appreciation to complement the option premium and the dividend.

General Electric is the least appealing of the DJIA components considered this week as its option premium is fairly small as it goes ex-dividend. However, General Electric is a stock that I repeatedly can’t understand why I haven’t owned with much greater regularity.

It has traded in a fairly predictable range, has offered an excellent and growing dividend and reasonable option premiums for an extended period of time. That’s a great combination when considering a covered option strategy.

Add Kellogg (NYSE:K) to the list of companies bemoaning the impact of a strong dollar on their earnings and future prospects for profits. Down nearly 5% on its earnings and a more impressive 9.6% in the past 3 weeks it also has to deal with falling cereal sales, which likely played a role in analyst downgrades this week. While currencies continually fluctuate and at some point will shift to Kellogg’s benefit, those sagging sales adjusted for currency effect, is a cause for concern, but not right away.

As with American Express that price decline brings shares to a more reasonable price point, well below where I last owned shares less 2 months ago. With an upcoming dividend in the March 2015 option cycle and only offering monthly options, I would consider selling March options bypassing what remains of the February contract in anticipation of some price recovery.

Facebook (NASDAQ:FB) has been uncharacteristically quiet since it reported earnings last month, as investor attention has shifted to Twitter (NYSE:TWTR).

Its share price has been virtually unchanged over the past 3 months but its option premiums have remained very attractive and continue to be so, even as it may have recently fallen off investor’s radar screens despite having avoided mis-steps that characterize so many young companies with great growth.

While I generally consider the sale of puts in advance of earnings and frequently would prefer not to take assignment of shares, Facebook is an exception to that preference. While I would consider entering a position through the sale of puts if shares move adversely the market for its options is liquid enough to likely allow put rollovers, or if taking assignment create an easy path for selling calls on the position.

Finally, I don’t really begin to make believe that I understand the dynamics of oil prices, nor understand the impact of prices on the various industries that either get their revenue by being some part of the process from ground to tank or that see a large part of their costs related to energy pricing. I certainly don’t understand “crack spreads” and find myself more likely to giggle than to ask an informed question or add an insight when the topic arises.

United Continental Holdings (NYSE:UAL) is one of those that certainly has a large portion of its costs tied up in fuel prices. While hedging of fuel can
certainly be a factor in generating profits, it can also be a tool to generate losses, as they have learned.

With about $1 billion in hedging related losses expected in 2015 United shares are down nearly 10% since having reported earnings. That’s only fair as its price trajectory higher over the previous months was closely aligned with the perception that falling jet fuel prices would be a boon for airlines, without real regard to the individual liabilities held in futures contracts.

As with energy companies over the past few months the great uncertainty created by rapidly moving prices created greatly enhanced option premiums. With oil prices having significant gains this week but still a chorus of those calling for $30 oil, it’s anyone’s guess where the next stop may be. However, any period of stability or only mildly higher fuel prices may still accrue benefit to those airlines that had been hedged at far higher levels, such as United.

While we think about an “energy sector,” there’s no doubt that its comprised of a broad range of companies that fit in somewhere along that continuum from discovery to delivery. It’s probably reasonable to believe that not all portions of the sector experience the same level of response to price changes of crude oil.

Western Refining (NYSE:WNR) is ex-dividend this week and reports earnings the following week. It’s in a portion of the energy sector that doesn’t suffer the same as those in the business of drilling when crude oil prices are plunging, as evidenced by the refiner’s performance relative to the S&P 500 in 2015.

If previous earnings reports from many others in the sector are to act as a guide, although there have been some exceptions, any disappointing earnings are already anticipated and Western Refining’s report will be well received.

For that reason, I might consider, as with Kellogg, bypassing the February 2015 option contract and considering a sale of the March 2015 contract, which also provides nearly a month for share price to recover in the event of a move lower upon earnings.

Traditional Stocks: American Express, Coca Cola, Intel, Kellogg

Momentum Stocks: Facebook, United Continental Holdings

Double Dip Dividend: General Electric (2/19), Johnson and Johnson (2/20), Western Refining (2/18)

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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Beware of Earnings Unless You Dare

Although the first week of this most recent earnings season has been less than spectacular, as the financial sector has suffered under a low interest rate environment, I continue to look at the more speculative portion of my portfolio as being available to generate quick income from stocks before or after earnings are announced.

During a week that stocks, interest rates, oil, precious metals and currencies have all gyrated wildly, what’s a little added speculation with earnings?

The process of trading in anticipation or after earnings news is one that seeks to balance risk with reward, accepting a relatively small reward in exchange for taking on a level of risk that appears to be less than the market is expecting.

The basic concepts and considerations in the approach are related to:

  • personal ROI goal;
  • individual temperament for risk, and
  • time and ability to trade in or out of risk in response to events.

The concepts are covered in previous articles, but in summary, the objective is to find a stock that can deliver an acceptable ROI when selling a weekly put option at a strike level that is lower than the bottom of the range defined by the option market’s implied volatility for that stock.

For my tolerances I seek a 1% ROI for a weekly position at a strike price that is outside the boundaries implied by the option market.

While achieving the desired ROI is an objective metric, and should be done within the context of acceptable risk, the decision process to initiate a trade is frequently based upon share behavior.

My preference, when it appears that both the risk and the reward measures are satisfactory, is to sell puts into share weakness in advance of earnings. If that condition isn’t met, I may also consider the sale of puts after earnings if there is significant price weakness after the report.

After Friday’s strong close, which may have come as a surprise to most everyone after a week of declines, many stocks reporting earnings next week may now be coming off of Friday’s advances. Insofar as Friday’s performance may have represented a reflexive bounce higher, I would be initially reluctant to jump into any put sale related trades for concern about an equally reflexive drop lower.

However, a number of the positions covered in this article have already suffered large losses in advance of their earnings report, some perhaps due to altered guidance and many are already well off from their highs, even as the S&P 500 is barely 4% lower after a quick triple bottom.

I tend to be more interested in those stocks that have already fallen than I am in those whose shares are moving higher prior to earnings, as that moves the strike level that I would have to use to achieve my desired 1% ROI for the week higher, and may also shift premium enhancement on the call side of the equation, rather than to the put side, which also contributes to a lower ROI.

While the traditional opinion and belief is that put sellers must be willing to own the shares in which they have sold puts, I often do not want to take ownership unless an ex-dividend date is approaching. While many sell puts in order to gain an entry into share ownership at a lower and more attractive price, I do so generally in order to capture the income stream from the option sales.

For that reason, it is important to have liquidity in the options market in order to be able to concurrently close the position and open a new one for a forward week if assignment is unwanted. Ideally, that would also be done at a lower strike price, however, in an otherwise low volatility environment, as we currently have, despite some recent increase, that is a difficult objective unless there is additional stock specific volatility, as may be seen in the energy sector currently.

Whether able to rollover to a lower strike level or not, the primary goals are to delay or prevent assignment and to collect additional net premiums in an attempt to ultimately see the position expire or be closed.

Among the stocks for consideration this week are many that can be readily recognized for inherent risk, which may also influence price behavior on a regular basis regardless of upcoming earnings or guidance.

This week I’m considering the sale of puts of shares of Cree (NASDAQ:CREE), Freeport McMoRan (NYSE:FCX), F5 Networks (NASDAQ:FFIV), General Electric (NYSE:GE), International Business Machines (NYSE:IBM), Intuitive Surgical (NASDAQ:ISRG), Netflix
(NASDAQ:NFLX), Starbucks (NASDAQ:SBUX), SanDisk (NASDAQ:SNDK) and United Continental Holdings (NYSE:UAL).

 

 

Generally I don’t spend too much time considering the relative merits of the stocks being considered for earnings related trades, preferring to remain agnostic to those issues and simply following guidelines outlined above.

Looking at this week’s list, there is no shortage of stories in advance to scheduled earnings, such as SanDisk releasing altered guidance or Freeport McMoRan feeling the sudden weight of collapsing copper prices, in addition to its growing exposure to gold and energy prices.

While I don’t use margin to add stock positions, it is often perfectly suited for this kind of trading activity. I generally use these trades in an account hat has margin privileges. While selling cash secured puts decreases the amount of margin that is available to you, it does not draw on margin funds and, therefore, doesn’t incur interest expenses. Those expenses will only be incurred if the shares are assigned to you and are subsequently purchased through the use of the credit extended.

One thing noticed among the positions cited above is that fewer are meeting my criteria and being assigned a “YES” designation. That may reflect an increasing sense of pessimism among option market traders as compared to previous quarterly earnings periods. Normally I would only consider those with a “YES” rating, but may now also consider those that are “MARGINAL.”

If considering the sale of put options, there is always a possibility of early assignment, especially if shares go far below the strike price and when using a weekly contract. If that occurs, the seller of the put contracts should be prepared to either own shares or attempt to rollover the put option to a forward date.

The lower the volatility environment the less benefit there is to the put holder to delay assignment for deep in the money positions. In the event of early assignment the opportunity is then created to begin managing shares and enhancing return through the sale of call options. However, where possible, it may be best to consider pre-emptive action in order to prevent or delay assignment.

Finally, in the current market environment, moves, especially downward, seem to be sudden and magnified. If pursuing any of these earnings related trades it helps to have exit strategies planned in advance and to limit falling prey to surprise, as that may be the one thing that can be counted upon.

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Weekend Update – January 4, 2015

If you follow the various winning themes for the past year, any past year for that matter, the one thing that seems fairly consistent is that the following year is often less than kind to the notion that good things can just keep happening unchanged.

Often the crowd has a way of ruining good things, whether it’s a pristine and previously unknown hidden corner of a national park or an obscure trend or pattern in markets.

Back in the days when people used to invest in mutual funds the sum total of many people’s “research” was to pick up a copy of Money Magazine and see which was the top performing fund or sector for the year and shift money to that fund for the following year.

That rarely worked out well.

You don’t have to think too far back to remember such things as “The January Effect” or “Dogs of the Dow.” The more they were written about and discussed, and the more widely they were embraced, the less effective they were.

The “Santa Claus Rally” wasn’t very different, at least this year, even as the final day of that period for a brief while looked as if it might end with an upward flourish, but that too disappointed.

Remember “Sell in May and then go away”?

Like most things, the more you anticipate joining in on all of the fun that others have been having, the more likely you’re going to be disappointed.

The latest patterns getting attention are the “years ending in 5” and “Presidential election cycles in years ending in 5.” They may have some history to back up the observations, but seemingly overlooked is the close association between those two events, that are not entirely independent of one another.

Since 2015 happens to be both a year ending in “5” and the year preceding a presidential election, it is clear that the only direction can be higher. What that leaves is the debate over how to get to the promised land. That, of course, is the issue of the merits of active versus passive management of stock portfolios.

For purposes of clarity, the only “merit” that really matters is performance.

Those who have used a simple passive strategy over the past two years, perhaps as simple as being entirely invested in the SPDR S&P 500 Trust (NYSEARCA:SPY) to the exclusion of everything else, would have been hoisted on the shoulders of the crowd while hedge fund managers would have been trampled underneath.

The past two years haven’t been especially kind to hedge fund managers, b
ut they have been trampled for very different reasons in that time.

In 2013 who but a super-human kind of investor could have kept up with the S&P 500 while also trying to decrease risk? It’s not terribly easy to match a 30% gain. Hedging has its costs and if markets go only higher those costs simply eat into profits.

In 2014, though, it was a different issue, as the only people who really prospered, in what was still a good year, were those who didn’t try to outsmart markets, as it was almost impossible to even begin classifying the market in 2014. The continual sector rotation either required lots of luck to be continually on the right side of trades or lots of real skill and talent.

Luck runs out. Skill and talents have greater staying power and there’s a reason that only a handful of money managers are well known and regarded for more than a year at a time.

What is fascinating about the market is that even as it ended the year with a very respectable gain those who tried to finesse the market by actively trading don’t have the same kind of elation about its performance.

Just ask them.

So the question is whether the simplicity of a passive strategy is going to again be superior to an active strategy in 2015

As an active trader I’d like to think that passivity will be passé as the new year begins. Of course, you do have to wonder how that arbitrary divide that begins after New Years can actually create an environment with a different character, but somehow that arbitrary divide creates a situation where very few years are like the year preceding it.

I have reason to believe that I have neither skill nor luck, so can only count on the observation that a good thing becomes less of a good thing with time.

Popularity is superficial, while history runs deep.

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

I also like to think that I’ve never really had an original thought.

This week’s potential stock selections to begin 2015 may be an excellent example of the lack of originality, as all of the names are either recent selections, purchases or assigned positions. Add to that their general lack of exciting qualities and you have a really impotent one – two punch to start the year.

With earnings season set to begin the week after this coming week there’s plenty of time for excitement. However, with the upcoming week featuring an FOMC Statement release and the Employment Situation Report, there’s already enough excitement in the upcoming week to want to add to it.

The scheduled events of this week also offer more than enough opportunity to add to this past week’s broad weakness, particularly if the FOMC emphasizes strong GDP data or there is unusually large employment growth, either of which could signal interest rate increases ahead.

In that kind of environment, even if widely expected, the immediate reaction would likely be a shock to the system and I would prefer my exposure to be offset by the security of size and quality. Characteristics that coincidentally may be found in components of the S&P 500, so favored by passivists.

Among those are three members of the DJIA.

General Electric (NYSE:GE), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ) are among this week’s list.

Intel is a little bit of an anomaly to be included in the list, as it was the best performing of the DJIA stocks in 2014 and might, therefore, be reasonably expected to lag in 2015. However, I think that those who would have been prone to pile into the stock because of its performance in the past year would have already done so, as its most recent performance has trailed the S&P 500.

What appeals to me about Intel’s shares for a very short term trade is that the crowd turned very suddenly on them on Friday, giving up nearly all of an almost 3% gain earlier in the trading session. With that arbitrary divide creating its own unique trading dynamics, Intel may not receive quite the same attention as General Electric and Verizon, as those may garner notice because they are among those “dogs” that still have faithful adherents.

But beyond that, Intel still has a fundamentally positive story behind its climb in 2014 and may again be well aligned with the fortunes of a Microsoft (NASDAQ:MSFT), as it continues on its return to relevance. For a short term trade in advance of its upcoming earnings report on January 15, 2015, I wouldn’t mind it trading listlessly in return for the option premium.

General Electric is simply at a price point that I find attractive, having recently had shares assigned. It certainly hasn’t been a very attractive stock over the years for much of anything other than a covered option strategy, but it has been well suited for that, as long as it can continue to trade in a relatively narrow range.

Verizon will be ex-dividend this week and is down nearly 9% from its high in November. Bruised a little due to increasing competition among mobile providers and sustaining the expenses of subsidizing the iPhone, it will report earnings in less than 3 weeks and I might want to either be out of any position prior to then, or if not, use an extended weekly option if having to rollover a position to acquire some additional premium in protection, in the event of an adverse response to earnings.

Dow Chemical (NYSE:DOW) has had its fortunes most recently closely aligned to the energy sector. WHile owning a more expensive lot, I’ve traded other lots as shares have fallen in an effort to generate quick returns from option premiums and share appreciation.

As those shares again approach $45.50 I would like to do so again, but recognizing that oil is at a precarious level, as it gets closer to the $50 level, which if breached, could pull Dow Chemical even lower.

That increased volatility due to the uncertainty in the energy sector has made the option premiums much more appealing. However, even with that challenge, Dow Chemical has the advantage of a highly competent and long serving CEO who is increasingly responsive to the marketplace as he has activists breathing down his neck.

The Mosaic (NYSE:MOS) story isn’t one of being held hostage by an energy cartel and falling prices, as is the case with Dow Chemical, but rather it fell prey to the collapse of the much less well known potash cartel.

Hopefully, the time frame will be far shorter for Dow Chemical than it has been for Mosaic, as I’ve been sitting on some much more expensive shares for quite a while. In the interim, however, Mosaic has offered many opportunities for entering into new positions in the hopes of quick assignment and capturing option premiums, dividends and some occasional capital gains on shares.

While its next dividend is till some months away, it is now quickly again in the price range at which I like to consider adding shares again, although it could still go even lower. However, as long as it does continue trading in this relatively narrow range, it is capable of generating serial option premiums and even if its performance may seem mediocre on a yearly basis, its ROI can be very attractive.

I don’t get terribly excited about food stocks, but when looking for some relative calm, both Campbell Soup (NYSE:CPB) and Kelloggs (NYSE:K) may offer some respite from any tumult that may confront the market next week.

Both were recently assigned and at these levels I wouldn’t mind owning them again. In the case of Campbell Soup, that means the opportunity to capture its dividend and not be concerned about its next earnings until the March 2015 option cycle.

Kellogg is a stock that I would consider buying more often, however, the decision is related to how closely its price is to one of the strike levels on its monthly options.

Unlike Campbell Soup which has strikes at $1 intervals and many weekly options have $0.50 intervals, Kellogg options utilize $2.50 intervals, which can make the premiums relatively unattractive if the share price is at a distance from the strike at the time of the proposed sale of option contracts.

Finally, my plan to add shares of eBay (NASDAQ:EBAY) a couple of weeks agowent unrequited. The fact that its shares are now 2% lower doesn’t necessarily make me salivate over the prospects about adding shares now, as the past two weeks could have represented lost opportunities to generate option premiums and in a position to do so again in the coming week, as shares seem to be settling in at this higher level.

The coming year may be a fascinating one for eBay as the speculation grows about the planned spin off of PayPal, which may never make it to an IPO as it may be coveted by another company.

Of course, who might benefit from that detour is also open to question as eBay itself may be in the crosshairs of an acquiring behemoth.

For now, I still like owning eBay shares and usually selling near or in the money calls, but I would increasingly consider setting aside a portion of those shares for the kind of capital gains that so many have moaned about not having seen over the years as slings and arrows have consistently been thrown in eBay’s direction.

Traditional Stocks: Dow Chemical, eBay, General Electric, Intel, Kellogg, Mosaic

Momentum Stocks: none

Double Dip Dividend: Campbell Soup (1/8), Verizon (1/7)

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 – December 7, 2014

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

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

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

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

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

I suppose the answer may depend on the criteria one uses to define “good.” as well as whether one believes that things would have been better without him or his economic policies, or whether their time frame is forward or backward looking. Continue reading “Weekend Update – December 7, 2014”

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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 20, 2014

While I don’t necessarily believe that space aliens will descend upon us with laser rays blazing, there’s reason to increasingly believe that possibility as we learn more and more about the existence of conditions elsewhere in the universe that may be compatible with sustaining life.

Still, even with that knowledge, I don’t let it control my life and quite frankly will probably never do anything that in any way is impacted by the thought of an encounter with an alien.

The principle reason for not elevating the alarm level is that there is no point in history to serve as an example. The pattern of life on earth has been so far devoid of such occurrences, as best we know. Right now, that’s good enough for me.

However, I just don’t completely discount the possibility, because I believe that it’s of a very low probability. Besides, the vaporization process would be so swift that there would be no time for remorse or regrets. At least that’s what I expect.

By the same token I don’t expect a complete meltdown in the market, even though I know it has and can, likely occur again. Despite its probability of occurrence and my belief of that probability, I’m not really prepared for one if it were to occur, even with the extraordinarily low cost of portfolio protection. The chances of a complete meltdown, as we know, is probably more likely to occur in the near term than the prospect of laser waving aliens in our lifetimes.

For all practical purposes one is a real probability and the other isn’t, yet they aren’t necessarily placed into different risk categories at the moment.

This week’s events, however, served as a reminder that the unexpected should always be expected. With the nice rebound on Friday from Thursday’s news of the tragic downing of the civilian Malaysian airplane, the lesson may be lost, however.

One thing that we seem to have forgotten how to do in the past 5 years is to expect the unexpected. Instead our expectations have been fueled by the relentless climb higher and a feeling of invincibility. To a large degree that feeling has been justified as every attempt to fight back against the gains has been stymied in quick and due course.

I probably wasn’t alone in having that invincible feeling way back in 2007. The vaporization process was fairly swift then, as well.

Even when faced with challenges that in the past would have sent markets tumbling, such as international conflict, we haven’t seen the application of age old adages such as “do not stay long going into a weekend of uncertainty.” This Friday’s market rebound was another example in a long string of uncertainty being expected to not lead to the unexpected.

In essence with the certainty of an ever climbing market having become the new reality there’s been very little reason to exercise caution, or at least to be prepared to act in a cautious manner in the expectation that perhaps the unexpected will occur.

Our minds are wired to like and identify patterns. That’s certainly the strategic basis for stock trading for many. Predictability brings a degree of comfort, but too much comfort brings complacency. The prevailing pattern simply argues against the unexpected, so we have discounted its probability and to a large degree its possibility.

While we may be correct in discounting complete market meltdowns, as their occurrence is still relatively uncommon, that complacency has us discounting intermediate sized moves that can easily come from the unexpected. The world is an increasingly complex and inter-connected place and as seen in the past week there needn’t be advanced warning signs for any of an infinite number of unexpected events to occur.

We did get lucky this past week, but we probably expected the luck to continue if the unexpected did strike. What would really be unexpected would be to draw a lesson from our fragility standing near market highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. With many companies reporting earnings this coming week a companion article, “Taking a Gamble with Earnings,” explores some additional potential trades.

As Thursday’s trading was coming to its close at the lows of the session more and more stocks were beginning to return to what seemed to be more reasonable trading levels.

The problem, of course, is dealing with the unexpected and trying to predict what comes next when there are really no data points to characterize what we’ve seen. Someday when we look back at these events and the market impact we may see a pattern, but at the moment the question will be “which pattern?” Is it one that’s simply a blip and short-lived as the event itself is self-limiting or is the pattern consistent with the beginning stages of what is to become an ongoing and escalating series of events that serve to erode confidence and place continuing strains on the market?

In other words, did we just witness a typical over-reaction and subsequent rebound or are we ready to witness a correction?

I think its the former, but it opens the possibility of additional incidents and escalation of hostilities in a part of the world that is far more meaningful to the world’s economies than unheralded internecine conflicts occurring in so many other places.

Interestingly, with that kind of backdrop, this week, while we begin to sort out what the short term holds, “Momentum” kind of stocks, particularly those with little to no international exposure in the hotbed areas, may be more conservative choices than the more Traditional selections.

While I like British Petroleum (BP), General Electric (GE) and Deere (DE) this week, predominantly due to their recent price drops, there is certainly reason to be wary of their exposure to parts of the world in conflict.

British Petroleum certainly has known interests in Russia and could be at unique risk, however, I believe that we will be seeing a lesser chest thumping Russia in the n
ear term as there is some reason to believe that existing sanctions and perhaps expanded ones are beginning to get attention at the highest levels. Above all, pragmatism would dictate not injuring the source of hard currency.

I’ve been waiting a while to re-purchase shares of British Petroleum and certainly welcome any opportunity, even if still at a price higher than my last entry. With earnings scheduled to be reported July 29, 2014 and a healthy dividend sometime during the August 2014 option cycle there may be opportunities over the coming weeks with these shares to generate ongoing income.

General Electric reported its earnings this past Friday and also announced the impending IPO of its consumer finance business. The market was unimpressed on both counts.

I haven’t owned shares of General Electric with the frequency that it deserved. With a generous and increasing dividend, price stability, low beta and decent option premiums, it certainly has had the appeal for ownership, perhaps even using longer term option contracts to better  lock in some of those dividends. While it has significant international exposure the recent price weakness makes entry a little less risky, but even with the quality and size of General Electric unexpected bumpy rides can be possible when uncontrollable events create investor fear.

Deere is simply finally down to the price level that in the past was my upper range for purchase. With Caterpillar (CAT) reporting earnings later this week and trading near its 52 week high, there is room on the downside, as well as some trickle down to Deere shares. However, with Joy Global’s (JOY) recent performance, my anticipation is that Caterpillar’s Chinese related revenues will be enough to satisfy traders and offer some protection to Deere, as well.

On the Momentum side of the equation this week are Best Buy (BBY), Las Vegas Sands (LVS) and YUM Brands (YUM).

While Las Vegas Sands and YUM Brands certainly have international exposure, at the moment if you had to choose where to place your overseas bets, China may be relatively insulated from the unexpected elsewhere in the world.

Both companies are coming off weak earnings reports and the markets reacted accordingly. Both, however, have been very resilient to declines and finding substantive support levels in the past. With some shares of Las Vegas Sands recently assigned at current levels I would look for opportunity to re-purchase them. It’s volatility offers generous option premiums and the availability of expanded weekly options makes it easier to consider rollover opportunities in the event of unexpected price drops in order to wait out any price rebound, which has been the expected pattern.

YUM Brands is, like Deere, finally approaching the upper range of where I have purchased shares in the past. While I would like to see them even lower, I think that due to its dependence on the Chinese economy and market it may be a relative out-performer in the event of internationally induced market weakness.

Best Buy, unlike YUM Brands and Las Vegas Sands, has recently been on an upward price trajectory. I liked it much better when it was trading in the $26 range, but I believe it still has further upside potential in its slow climb back after unexpectedly bad earnings news 6 months ago. It too has an attractive option premium and a dividend and despite its recent price climb higher has come down nearly 5% in the past two weeks.

I have never purchased shares of Pandora (P) before, but love its product. At the moment I don’t particularly have any great desire to own shares, but Pandora does report earnings this week and is notable for its 10.8% implied price move. In the meantime a 1% ROI can be achieved at a strike price that is 16.4% below the current price. Those are the kind of characteristics that I like to see when considering what may otherwise be a risk laden trade.

Pandora has certainly shown itself capable of making very large earnings related moves and it is also certainly in the cross hairs of other and bigger players, such as Apple (AAPL) and Google (GOOG). However, even a scathing critic, TheStreet’s Rocco Pendola, has recently commented that its crushing defeat at the hands of those behemoths is not guaranteed.

Expected, maybe, but not guaranteed.

Facebook (FB) is also reporting earnings this coming week and in the two years that it has done so has predominantly surprised to the upside as it has quickly lived up to its vow to monetize its mobile strategy.

With an implied price move of 7.6% the strike level necessary to generate a 1% ROI through the sale of puts is 8.7% below Friday’s closing price. While shares can certainly make a move much larger than what is expected by the option market, in the event of an adverse move Facebook has some qualities that makes it an easier put option position to manage in the effort to avoid assignment.

It trades expanded weekly options and it does so with liquidity and volume, thereby having relatively narrow bid and ask spreads, even for deep in the money options.

Sooner or later, though, the expectation must be that earnings expectations won’t be met. I wouldn’t discount that possibility, although I think the options market may have done so a bit, so in this case I would be more inclined to consider the sale of puts after earnings, if share price drops on a disappointing report.

Finally, Apple reports earnings this week. It doesn’t really fulfill the criteria that I used when considering the sale of puts prior to earnings, in that it doesn’t appear that a 1% ROI can be achieved at a strike level outside of the range defined by the option market when calculating the “implied move.”

It’s probably useless trying to speculate on sales numbers or guidance. Based on its usual earnings related responses in the past, you would be justified in believing that the market had not expected  the news. However, this quarter the implied move is on the small side, at only 4.5%, suggesting that not much in the way of a surprise is expected next week.

With the current option pricing, the sale of Apple puts doesn’t meet my criteria, but I would again be interested in considering either the sale of puts after earnings, if the market’s response is negative or the outright purchase of shares and sale of calls, in anticipation of an ex-dividend date coming up in early August.

Sometimes it’s just
easier dealing with the expected.

Traditional Stocks:  British Petroleum, Deere, General Electric

Momentum: Best Buy, Las Vegas Sands, YUM Brands

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (7/22 PM), Facebook (7/23 PM), Pandora (P)

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 – June 15, 2014

It’s hard to believe that there was ever a period of a few hundred years with relative peace and little military expansion.

It’s not too hard to believe that almost 2000 years have passed, but given that the Pax Romana was followed by the Middle Ages we may want to re-think the idyllic and beneficial nature of peace.

The “Pax Romana” sounds so quaint in an era when even a week without new conflict seems like a gift from the heavens, but the markets need some kind of conflict, physical or otherwise, to keep it functioning in a rationale manner. Otherwise it gets left to its own self and that could have consequences.

This past week was one in which there was no real scheduled news and very little was expected to be happening to shake markets. It was a week when I thought the real challenge would be balancing new market highs achieved in very tentative fashion with the vacuum that can generate largely uncatalyzed moves.

In that vacuum too much quietude can lead to lots of introspection, and over-analysis, not to mention those voices that start telling you what you really should be doing. In that vacuum it’s not too unusual to see over-exaggerated responses to otherwise benign factors.

Who knew that the vacuum could be so easily magnify the results of a primary election in a small congressional district?

For some reason that was the conventional wisdom explaining the first of two triple digit losses mid-week, despite little rationale reason to believe that the political landscape could get any less accommodating. Why in the world a roadblock toward achieving immigration reform could jeopardize stock health is a difficult thesis to weave, but that was the story and everyone stuck to it, while ignoring the fact that the World Bank had cut its forecasts for global growth.

However, the following day there really was something to be concerned about and that was the disruption of a week’s worth of world peace as news came of a mostly unknown army beginning to conquer Iraq and marching toward its capital with Patton-like speed.

Its name “ISIS,” an acronym for “The Islamic State in Iraq and Syria” is an unfortunate situation for Isis Pharmaceuticals (ISIS). It reminds me a bit of the early 1980s and the one time popular diet suppressant, AYDS. Hopeful Isis Pharmaceuticals will respond better than the decision to rename a product as “Diet Ayds.”

But with tensions rising as this past week came to its close the market once again did the unexpected, just as it had done through much of 2011, 2012 and 2013.

If the lessons of the Crimean and Ukraine crises have taught us anything it’s that Friday crises tend to be good for whatever it is that’s ailing the markets.

Going into a weekend of uncertainty the market again failed to sell off and abide by the age old wisdom of not staying long going into a weekend of uncertainty.

Lately, it seems that the market thrives most when peace, whether that of political compromise necessary for a budgetary agreement or that of a cease fire, is itself at risk. With all of the recent talk about complacency, while the Volatility Index may reflect the level of past complacent behavior, the decision to ignore the unknown that may come from a marauding army marching into a nation’s capital is a true measure.

While we all want peace in every aspect of our lives there is a sense of “schadenfreude” that may exist when realizing that it is ongoing tension that may serve to keep markets thriving rather than focusing upon itself and realizing that sometimes heights are untenable.

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

In  addition to the certainty of conflict that seems to occur on a very predictable basis, so too is there certainty lately that General Motors (GM) will be in the news and not for a good reason. With even more recalls announced last week there really hasn’t been much good news for quite a while, but as we saw last week, that didn’t seem to have any impact on sales.

To its credit despite all of the adverse news General Motors has defended the $35 level very nicely, as long as you’ve had a little bit of faith and patience while others either took profits or panicked.

Following a little bit of weakness and demonstrating that shares can absorb incredible amounts of bad news, General Motors offers some good opportunities for use in a covered option strategy, as it offers an attractive dividend that results from its frequent price gyrations. With it’s equally attractive dividend it is easier to be patient while watching shares move up and down. The availability of expanded weekly options adds considerable latitude in how shares are managed while awaiting those price movements.

With the recent revision to GDP there may not be much reason to be optimistic about near term economic growth. However with continuing and steady growth in employment and perhaps bolstered by news from one time leader Intel (INTC), of increasing fortunes, I again took to my proxy for economic growth, Fastenal (FAST). 

I already own shares that may be assigned this coming week, but would not be adverse to rolling them over as they approach the purchase price after some recent weakness. I would also consider either replacing those shares, if assigned, or even adding additional shares and would further consider using some longer term options, such as the July or August 2014 contracts. The latter also adds the possibility of capturing a dividend payment.

Nike (NKE) isn’t a company that I’ve owned very often, although it is one that I look at each week when thinking of possible replacements for assigned shares. Unfortunately, this week I didn’t have any assignments and that makes me a little more guarded about adding new positions and eroding my cash position. However, it’s hard to formulate a thesis whereby Nike is disproportionately damaged by any breach of peace in the world. I also look at shares of Nike as currently being on sale after some recent losses. 

Lowes (LOW) on the other hand, is a company that I’ve owned with some frequency, as recently as a week ago. It, too, is on sale after last week’s market movements and without any real reason for its price drop.

Lowes fits the profile of companies that have been especially kind to me, in that it tends to move within a defined range, deals with an easily understandable product and happens to offer reasonable option premiums and a fair dividend.

While there’s nothing terribly exciting about the company that sits in the shadow of a larger competitor and isn’t too likely to gain from future growth nor suffer from growth disappointments, there is something exciting about booking profits at a tolerable level of risk.

With some recent concerns about its future in the Russian marketplace having been put at ease, MasterCard (MA) has rebounded from its recent lows. It is among those stocks that has seen me hoping for a drop in value and did so a bit over the past week. My comfort level with purchasing new shares is in the $76 range and it is currently just below that level, inviting some consideration. However, I may be inclined to sell puts on shares as my preference is a lower entry price. If doing so and the shares dropped below the strike I would assess whether to attempt to rollover the puts in an effort to get an even lower entry price or whether to accept assignment and position myself to sell calls and perhaps collect the trivial dividend early next month.

The week’s two potential dividend plays are very much at extremes of the spectrum. General Electric (GE) is fairly staid, moves in small doses, while Las Vegas Sands (LVS) is quite the opposite.

General Electric is a company that I don’t own often enough and am never quite certain why that is the case. It too tends to trade in a definable range, is not terribly volatile, offers a reasonable option premium and an excellent dividend. All of that sounds compelling to me, with perhaps this being the week, as the dividend serves as a lure.

Las Vegas Sands, which I purchased last week and may lose to early assignment, is still at the lower end of its recent trading range, despite the good showing last week. While I don’t particularly like chasing stocks that have risen, regardless of how much higher they may still need to go to get to recent highs, here too, the dividend may be a potent lure. While the premium is always attractive, I think that the near term lower boundary on the trading range may have been defined at about $72.

Finally, everyone who loves dysfunction would certainly be attracted to Darden Restaurants (DRI).

Not too long ago its CEO, Clarence Otis, was hailed as a genius and in touch with the casual dining needs of the nation. Now, he is castigated as caring only about his own fate and selling Darden’s assets at ridiculously low valuation in an effort to fend off activists.

Whatever.

I rarely want to consider an earnings related trade unless there are weekly and preferably expanded weekly contracts available and then usually consider the sale of puts. Sadly, in Darden’s case there are only monthly contracts, but this happens to be the final week of the monthly cycle, so in a perfectly executed strategy this could be a weekly trade.

However, despite that, I look at a potential share purchase of Darden and looking at a longer term commitment, with consideration of selling July 2014 calls in the hope of also capturing its very healthy dividend.

Dysfunction can sometimes play the same role as conflict. Sure, normalcy is far easier to deal with, but as with peace, where’s the excitement in that?

 

Traditional Stocks: Fastenal, Lowes, MasterCard, Nike

Momentum:  General Motors

Double Dip Dividend:  General Electric (6/19), Las Vegas Sands (6/18)

Premiums Enhanced by Earnings: Darden Restaurants (6/20)

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 – March 16, 2014

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.  

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w
ith some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will b
e investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

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.

Posted on

Weekend Update – February 16, 2014

Is our normal state of dysfunction now on vacation?
Barely seven trading days earlier many believed that we were finally on the precipice of the correction that had long eluded the markets.
Sometimes it’s hard to identify what causes sudden directional changes, much less understand the nature of what caused the change. That doesn’t stop anyone from offering their proprietary insight into that which may sometimes be unknowable.
Certainly there will be technicians who will be able to draw lines and when squinting really hard be able to see some kind of common object-like appearing image that foretold it all. Sadly, I’ve never been very adept at seeing those images, but then again, I even have a hard time identifying “The Big Dipper.”
Others may point to an equally obscure “Principle” that hasn’t had the luxury of being validated because of its rare occurrences that make it impossible to distinguish from the realm of “coincidence.”
For those paying attention it’s somewhat laughable thinking how with almost alternating breaths over the past two weeks we’ve gone from those warning that if the 10 year Treasury yield got up to 3% the market would react very negatively, to warnings that if the yield got below 2.6% the markets would be adverse. There may also be some logical corollaries to those views that are equally not borne out in reality.
Trying to explain what may be irrational markets, which are by and large derivatives of the irrational behaviors found in those comprising the markets, using a rational approach is itself somewhat irrational.
Crediting or blaming trading algorithms has to recognize that even they have to begin with the human component and will reflect certain biases and value propositions.
But the question has to remain what caused the sudden shifting of energy from its destruction to its creation? Further, what sustained that shift to the point that the “correction” had itself been corrected? As someone who buys stocks on the basis of price patterns there may be something to the observation that all previous attempts at a correction in the past 18 months have been halted before the 10% threshold and quickly reversed, just as this most recent attempt.
That may be enough and I suppose that a chart could tell that story.
But forget about those that are suggesting that the market is responding to better than expected earnings and seeking a rational basis in fundamentals. Everyone knows or should know that those earnings are significantly buoyed by share buybacks. There’s no better way to grow EPS than to shrink the share base. Unfortunately, that’s not a strategy that builds for the future nor lends itself to continuing favorable comparisons.
I think that the most recent advance can be broken into two component parts. The first, which occurred in the final two days of the previous trading week which had begun with a 325 point gain was simply what some would have called “a dead cat bounce.” Some combination of tiring from all of the selling and maybe envisioning some bargains.
But then something tangible happened the next week that we haven’t seen for a while. It was a combination of civility and cooperation. The political dysfunction that had characterized much of the past decade seemed to take a break last week and the markets noticed. They even responded in a completely normal way.
Early in the week came rumors that the House of Representatives would actually present a “clean bill” to raise the nation’s debt ceiling. No fighting, no threats to shut down the government and most importantly the decision to ignore the “Hastert Rule” and allow the vote to take place.
The Hastert Rule was a big player in the introduction of dysfunction into the legislative process. Even if a majority could be attained to pass a vote, the bill would not be brought to a vote unless a majority of the majority party was in favor the bill. Good luck trying to get that to occur in the case of proposing no “quid pro quo” in the proposal to raise the nation’s debt ceiling.
The very idea of some form of cooperation by both sides for the common good has been so infrequent as to appear unique in our history. Although the common good may actually have taken a back seat to the need to prevent looking really bad again, whatever the root cause for a cessation to a particular form of dysfunction was welcome news.
While that was being ruminated, Janet Yellen began her first appearance as Federal Reserve Chairman, as mandated by the Humphrey-Hawkins Bill.
Despite the length of the hearings which would have even tired out Bruce Springsteen, they were entirely civil, respectful and diminished in the use of political dogma and talking points. There may have even been some fleeting moments of constructive dialogue.
Normal people do that sort of thing.
But beyond that the market reacted in a straightforward way to Janet Yellen’s appearance and message that the previous path would be the current path. People, when functioning in a normal fashion consider good news to be good news. They don’t play speculative games trying to take what is clear on the surface to its third or fourth derivative.
Unfortunately, for those who like volatility, as I do, because it enhances option premiums, the lack of dysfunction and the more rational approach to markets should diminish the occurrence of large moves in opposite directions to one another. In the real world realities don’t shift that suddenly and on such a regular basis, however, the moods that have moved the markets have shifted furiously as one theory gets displaced by the next.
How long can dysfunction stay on vacation? Human nature being what it is, unpredictable and incapable of fully understanding reality, is why so many in need stop taking their medications, particularly for chronic disorders. I suspect it won’t be long for dysfunction to re-visit.
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).
Speaking of dysfunction, that pretty well summarizes the potash cartel. Along with other, one of my longtime favorite stocks, Mosaic (MOS) has had a rough time of things lately. In what may be one of the great blunders and miscalculations of all time, there is now some speculation that the cartel may resume cooperation, now that the CEO of the renegade breakaway has gone from house arrest in Belarus to extradition to Russia and as none of the members of the cartel have seen their fortunes rise as they have gone their separate ways.
In the interim Mosaic has traded in a very nice range after recovering from the initial shock. While I still own more expensively priced shares their burden has been somewhat eased by repetitive purchases of Mosaic and the sale of call contracts. Following an encouraging earnings report shares approached their near term peak. I would be anxious to add shares on even a small pullback, such as nearing $47.50.
^TNX ChartOne position that I’ve enjoyed sporadically owning has been MetLife (MET) which reported earnings last week. As long as interest rates are part of anyone’s equation for predicting where markets or stocks will go next, MetLife is one of those stocks that received a bump higher as interest rates started climbing concurrent with the announcement of the Federal Reserve;’s decision to initiate a taper to Quantitative Easing.
Cisco (CSCO), to hear the critics tell the story is a company with a troubled future and few prospects under the continued leadership of John Chambers. For those with some memory, you may recall that Chambers has been this route before and has been alternatively glorified, pilloried and glorified again. Currently, he has been a runner-up in the annual contest to identify the worst CEO of the year.
Personally, I have no opinion, but I do like the mediocrity in which shares have been mired. It’s that kind of mediocrity that creates a stream of option premiums and, in the case of Cisco, dividends, as well. With the string of disappointments continued at last week’s earnings report, Cisco did announce another dividend increase while it recovered from much of the drop that it sustained at first.
I’m never quite certain why I like Whole Foods (WFM). What this winter season has shown is that many people are content to stay at home any eat whatever gluten they can find rather than brave the elements and visit a local store for the healthier things in life. I think Whole Foods is now simply making the transition from growth stock to boring stock. If that is the case I expect to be owning it more often as with boring comes that price predictability that appeals to me so much.
This week’s potential dividend trades are a disparate group if you ignore that they have all under-performed the S&P 500 since its peak.
General Electric (GE) is just one of those perfect examples of being in the wrong place at the wrong time and perhaps not being in the right place at the right time. Much of General Electric’s woes when the market was crumbling in 2008 was its financial services group. Since the market bottom its shares have outperformed the S&P 500 by more than 50%, as GE has taken steps to reduce its financial services portfolio. Unfortunately that means that it won’t be in a position to benefit from any rising interest rate environment as can reasonably be expected to be in our future.
Still, coming off its recent price decline and offering a strong dividend this week its shares look inviting, even if only for a short term holding.
L Brands (LB) along with most of the rest of the retail sector hasn’t been reflective of a strong consumer economy. Having recovered about 50% of its recent fall and going ex-dividend this coming week I’m ready to watch it recover some more lost ground as its specialty retailing has appeared to have greater resilience than department store competitors. 
Transocean (RIG) still hasn’t recovered from its recent ratings cut from “sector outperform” to “sector perform.” I’ve never understood the logic of that kind of  assessment, particularly if the sector may still be in a position to outperform the broad market. However, equally hard to understand is the reaction, especially when the entire sector goes down in unison in response. Subsequently Transocean also received an outright “sell” recommendation and has been mired near its two year lows.
With a very healthy ex-dividend date this week I may have renewed interest in adding shares. While he has been quiet of late, at its latest disclosure, Icahn Enterprises (IEP) owned approximately 6% of Transocean and to some degree serves as a floor to share price, as does the dividend which is scheduled to increase to $3 annually.
However, as with L Brands, which also reports earnings on February 26, 2104, I would also consider an exit or rollover strategy for those that may want to mitigate earnings related risk that will present itself. Such strategies may include closing out the position below the purchase price or rolling over to a March 2014 option in order to have some additional time to ride out any storms.
There’s really not much reason to take sides in the validity of claims regarding the nature of Herbalife (HLF). It has certainly made for amusing theater, as long as you either stayed on the sidelines or selected the right side. With the recent suggestion that some on the long side of the equation have been selling shares this week’s upcoming earnings release may offer some opportunity, as shares have already fallen nearly 16%.
While the option market is only implying a 7.2% move in share price, the sale of a put can return a weekly 1% ROI even at a strike price 13.7% below the current price. That is about the largest cushion I recall seeing and does look appealing for those that may have an inclination to take on risk. I’m a little surprised of how low the implied price movement appears to be, however, the surprise is answered when seeing how unresponsive shares have been the past year upon earnings news.
Also reporting earnings this week is Groupon (GRPN), a stock that has taken on some credibility since replacing its one time CEO, who never enjoyed the same cycle of adulation and disdain as did John Chambers. While the “Daily Deal” space is no longer one that gets much attention, Groupon has demonstrated that all of the cautionary views warning of how few barriers to entry existed, were vacuous. Where there were few barriers were to exit the space. 
In the meantime the options market is predicting a 13.9% move related to earnings, while a weekly 1.3% ROI could possibly be achieved with a price movement of less than 19%. While that kind of downward move is possible, there is some very strong support above there.
Finally, there is the frustration of owning AIG (AIG) at the moment. The frustration comes from watching for the second successive earnings report shares climb smartly higher in the after-hours and then completely reverse direction the following day. I continue to believe that its CEO, Robert Benmosche is something of a hero for the manner in which he has restored AIG and created an historical reference point in the event anyone ever questions some future day bailout of a systemically vital company.
None of that hero worship matters as far as any proposed purchased this coming week. However, shares may be well priced and in a sector that’s ready for some renewed interest.

Traditional Stocks: AIG, Cisco, MetLife, Whole Foods

Momentum Stocks: Mosaic

Double Dip Dividend: General Electric (ex-div 2/20), L Brands (ex-div 2/19), Transocean (ex-div 2/19)

Premiums Enhanced by Earnings: Groupon (12/20 PM) , Herbalife (2/18 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 – January 5, 2014

There’s a lot to be said in support of those who practice a strategy of surrounding themselves with those that suffer by comparison of whatever attribute is under consideration.
Most of us intuitively know what needs to be done if we want to make ourselves or our actions look good when under scrutiny.
The mutual fund industry had done it for years. It’s all about what you compare yourself to, although looking good raises expectations for even more of the same and most of us also know how that often works out.
As observers it’s only natural that we make our assessments on the basis of comparison to whatever standard is available. Among our many human foibles is that we often tend to be superficial and are just as likely to forego deeper analyses when faced with pleasing circumstances. We also want to go with the perceived winners in the belief that they will always be winners. Certainly the investing experience doesn’t bear out that strategy. Yesterday’s winner isn’t necessarily tomorrow’s champion.
Fresh on the heels of a 31% gain in the S&P 500, 2014 is going to have a difficult time in comparison. While maybe hoping that 2015 is going to be an abysmal year in the meantime 2014 has to contend with the obvious stress of the obligatory comparisons.
For the individual investor 2013 has ended with so many stocks at or near their highs that it’s actually very difficult to find that lesser entity for comparison purposes. Everything just looks so good that nothing really looks good, especially going forward, which is the only direction that counts. Looking at chart after chart brings up strikingly similar patterns with very little able to stand out on the basis of its own beauty. Comparing one “super–model” to the next is likely to be an empty exercise for many reasons, but ultimately it becomes clear that there are no distinguishing factors to make anyone stand out.
Without comparisons our own minds get numb. We need differences to appreciate the reality of any situation. When so many stock charts begin to look so similar it becomes difficult to discern where to start when looking for new positions.
While another human tendency is the desire to go with winners this time of the year introduces a traditional concept that looks in the opposite direction for its rewards. This is the time of the year when the “Dogs of the Dow Theory” gets so much attention. In a year that so many stocks are higher the comparison to those that have truly under–performed is really heightened.
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). With earnings season beginning once again this week attention must also be diverted into the consideration of those reports when adding new positions and when selecting the time frame for hedging options. For that reason I’m looking increasingly at option time frames that offer some buffer in time between expiration dates and earnings dates, perhaps making greater use of expanded options and forward month expirations, as well.
This week’s potential selections varied widely in performance compared to the S&P 500 during 2013. While no “Dogs of the Dow” candidates are offered, some were dogs in their own right regardless of what they were being compared to at the time. But as always, since I like to hedge my bets and play on both sides of prevailing sentiment, there may be room for both out–performers and under–performers as 2014 gets underway.
While General Electric’s (GE) 33.5% gain for 2013 was laudable it essentially mirrored the S&P 500 for the year. An analyst downgrade on Friday had virtually no impact, although shares did fall nearly 2% the previous day to start the New Year. Increasingly shedding its dependence on financial divisions that helped to bring it to $6 just 5 years ago, GE may now be wondering if this wouldn’t be a good time to emphasize that division, as interest rates are beginning to rise. But even a stagnant GE in 2014 when considered in the context of its dividend and option premiums offers a good place to invest if the aim is to out–perform the S&P 500.
Barclays (BCS) is one of those in the financial sector that had greatly lagged the S&P 500 in 2013. With significant international exposure it shouldn’t be too surprising that it might better reflect the lesser fortunes experienced by the European markets, among others. I already own shares and will consider adding more as it appears that there will be a move higher which I expect will be confirmed by improved earnings when reported during the February 2014 option cycle, which may also see a dividend payment.
Chesapeake Energy (CHK) has long been a favorite stock upon which to sell covered calls or enter ownership through the sale of puts. It out–performed the S&P 500 by nearly the amount that Barclays under–performed for the year, but after some recent weakness that reduced shares by 7% its chart has started looking less like the crowd. While certainly not in the “loser” category it’s potential looks better to me than those that haven’t taken the time for the share price to take a breather of late.
As long as in comparison mode, last January Family Dollar Store (FDO) dropped 12% upon earnings release, which followed a 9% drop the previous month. The option market isn’t expecting a repeat of that performance, perhaps because shares are already down 11% since its September high. Instead a 5.9% implied move is priced into option contracts. The sale of out of the money puts at a strike price at the lower end of the implied move could return 0.9% for the effort. That is just below my typical threshold for making such a trade, but if looking for a relative “dog,” this may be the one ready for a rebound.
Joy Global (JOY) is one of those stocks that recently broke out of its reliable trading range. Once that happens I lose interest in re–acquiring shares, having already owned it on eight occasions in 2013. What I don’t lose is interest in seeing shares return to that range. Following an earnings related share fall the price rebounded beyond where it started is descent. However, a recent downgrade has started nudging shares back toward the upper edge of the range that has proved to be a good entry point. While no one really has any good idea of what awaits the Chinese economy and by extension, Joy Global’s fortunes, it has proven to be a resilient stock and offers an option premium to go along with its frequent alternations in price direction.
It has been a long time since I had own any communications stocks until a recent T–Mobile holding. While both Verizon (VZ) and AT&T (T)were core holdings during the recovery stages in 2009, I haven’t found them very appealing for much of the recovery. However, both do go ex–dividend this week and the cellphone services sector is certainly livening up a bit. But beyond that, for the first time in a long time there were glimpses of these shares offering meaningful option premiums during their ex–dividend week that seemed to warrant their consideration once again. In fact, I didn’t wait until Monday and purchased shares of Verizon after weakness on Friday and may elect to accompany those shares with its rival’s shares, as well.
Darden Restaurants (DRI) was a selection just a few weeks ago but went unrequited as news broke regarding activist investor coercion regarding potential spin–off plans for its low growth Red Lobster chain. Shares go ex–dividend this week and earnings pressure is still two months away. Although a $55 strike would require challenging its 52 week high, this is a potential trade that I would consider using a forward month contract, such as the February 2014, in anticipation of some increasing pressure from the investment community and activists intent on re–engineering.
Finally, a study in comparative contrasts are Walter Energy (WLT) and Icahn Enterprises (IEP). While Icahn Enterprises was nearly 145% higher for the year Walter Energy dropped nearly 54%.
While Carl Icahn may get more done on the basis of brute force investing and schoolyard tactics, Walter Energy now relies on the power of redemption and grace, and maybe just a little on business cycles.
A quick look at the comparative charts shows what a difference time can make, as Walter Energy greatly out–performed Icahn Enterprises prior to this year and how Icahn Enterprises had been simply a market performer until the past year.
Interestingly in the past month Walter Energy has risen about 15% while Icahn Enterprises has fallen a similar amount.
IEP Chart
This past year no one has received more attention for his investing and activism than Carl Icahn. This week yet another company Hertz (HTZ) acknowledged that it was in the Icahn crosshairs, as it adopted a poison pill provision to keep him at bay. Icahn Enterprises, a tangled web of holding companies and investment activities shows little sign of slowing down as long as the market remains healthy. With the ability to raise stock prices with a simple Tweet, Carl Icahn may be more in control of his destiny than the market was intended to allow.
With a healthy dividend likely during the February 2014 option cycle and an attractive option premium, Icahn Enterprises may be a good choice for someone with a little daring to spare, as the ascent has been steep.
Walter Energy, on the other hand, has been slowly working its way higher, although still having a long way to go to erase its past year’s loss. While there is certainly no guarantee that last year’s loser will be this year’s darling, Walter Energy certainly is the former. It has, however, for the daring, offered excellent option premiums even for deep in the money options, that do mitigate some of the risk inherent in ownership of shares.
Traditional Stocks: Barclays, General Electric
Momentum Stocks: Chesapeake Energy, Icahn Enterprises, Joy Global, Walter Energy
Double Dip Dividend: AT&T (ex–div 1/8), Darden (ex–div 1/8), Verizon (ex–div 1/8)
Premiums Enhanced by Earnings: Family Dollar Store
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.