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Weekend Update – June 29, 2014

There wasn’t much going on last week, but for what there was, you can be certain that there was a role played by some branch of government.

By no means I am a libertarian and I certainly understand the need for a beneficent government to protect those things that we hold dear, from assets to zoning, but this past week government seemed to be the singular driver of news during a week that was otherwise devoid of news.

For starters, we received yet another revision to the first quarter GDP, indicating a 2.9% decrease. That’s not the sort of growth that engenders much confidence in the economy, but it’s also the sort of report that doesn’t engender much confidence in the reporter.

Certainly for a market that is said to discount the future, learning that what you believed to have been true was patently false has to also shake confidence, particularly when you begin to wonder whether your own government’s reporting of economic data is any better than that from the nation we so readily disparage for the veracity of its reporting – China.

With the economic calendar so important each week, this coming week’s early Employment Situation Report, which has been fairly inconsequential for the past 6 months, may prove otherwise if either it offers data consistent with the  abysmal GDP statistic or is qualified by large downward revisions of previous months.

But with objective data reporting out of the way, the early part of the week was focused on Supreme Court rulings that were scheduled to be released as the current session comes to its end. The decision regarding the novel technology behind the Aereo product that delivers broadcast transmission to any internet enabled device was ruled unconstitutional and any company with local broadcasting interests soared on the decision. Essentially, the Supreme Court said that an antennae that is leased and captures broadcasts is illegal, while an antennae that is purchased and captures broadcast television is not.

Then the Internal Revenue Service came into focus as it ruled favorably on Iron Mountain’s (IRM) request to convert to a REIT, which was especially surprising since it had tentatively given an adverse opinion last year. The result was a surge in share price confounding those who believed that the price already fully discounted the opinion. This ruling could open the way for others to consider separating that portion of their business that generates revenues in corporate owned facilities into a REIT and enjoy those tax benefits.

Then there was the matter of the refiners that awoke Thursday morning to the shocking news that the US Department of Commerce was going to allow essentially unrefined oil to be exported, even without a license, thereby likely reducing margins at the refiners. That sector saw some brutalized victims and some clear victors from the decision.

Then there was the case of Verizon (VZ) that had a contract in Germany canceled for fears that the NSA could use the devices as an easy conduit for surreptitiously gathering intelligence. 

Finally, Barclays (BCS) drew attention from local government as the New York State Attorney General’s office filed suit against Barclays claiming “fraud and deceit” in the manner their dark pool trading was executed. Of course, when there’s one cockroach you can be certain that there are more to be found, so the financial sector becomes more widely suspect as Barclays is scrutinized.

But to be clear, I was certainly on the side of government when Janet Yellen, just the previous week gave reason to believe that interest rates would remain low, thereby suggesting that equities would be a more advantageous investment vehicle than bonds. Unfortunately, as soon as this past week started, that news was old and long forgotten, as the message had no carry over to this week’s trading.

While some of last week’s events were scheduled, others came as a surprise in more than their content. Hopefully this week will be one when the hand of government will remain invisible and allow the market to trade on something that hasn’t been seen in a long while – fundamentals.

However, now isn’t the time to hold one’s breath and it’s not necessarily likely that next week’s beginning of another earnings season will be the time to do so, either.

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

Holly Frontier (HFC) was one of those brutalized refiners whose shares plummeted upon the news that certain unrefined products could now be exported. The share drop has brought Holly Frontier to the lower end of the range in which it had been trading and in which I currently own shares. I’ve done so on five occasions this year and have watched shares go up and down in alternating quantum stages during that time. While I believe the reaction to the news may have been overdone and would like to add shares, as Holly Frontier has an appealing option premium, regular dividend and routinely pays a special dividend, as well, I would likely await to see some stability in its price as the week opens before making the decision.

I’ve been waiting a while to re-purchase shares of DuPont (DD) and after its surprise announcement of a lower earnings forecast on reduced seed sales that time may have arrived. At one time DuPont was a very frequent holding, but it’s been nearly two years since that last purchase. Since that time DuPont has started offering weekly options and much more recently expanded weekly options, greatly increasing its appeal. Like many other stocks that I consider for purchase, DuPont has that nice troika of option premium, dividend and price stability that can serve to minimize some market tremors.

Another major decliner this week was Dollar General (DG), which plunged upon news that its CEO was planning to retire sometime in 2015. Presumably, the rational for that plunge was that the company was therefore, less likely to be involved in a buyout or merger with Family Dollar Stores (FDO) as has been rumored, in the near term.

That doesn’t really seem to make very much sense to me. If the union of those two companies makes sense, as many believe that it does for both companies, it’s not terribly likely that a company would giv
e up on the idea and simply go on hiatus. They would most certainly get the process moving at an appropriate time, while ensuring that CEO succession was closely aligned with the objectives defined by the board, which will continue to be chaired by its current CEO who has indicated he would stay on during the transition period.

I actually purchased some shares in the final couple of hours on Friday in the belief that I could get a quick assignment while shares recovered and anticipated doing another purchase this coming week.

Instead, shares stumbled while trading in a wide range in the final hour and I eventually rolled over shares. However, I think that the reaction was very much not only an over-reaction, but also the wrong reaction to what was really benign news. That leaves me in a position to consider further adding shares this week.

Verizon seems to be paying a price for the US government’s alleged spying on German Prime Minister Angela Merkel and is reportedly losing government contracts in Germany to Deutsche Telecom (DT) over concerns that Verizon cell phones may be eminently capable of doing the NSA’s bidding overseas. A late day recovery restored shares above $49, but I would be anxious to purchase shares if approaching that level again, mindful of its ex-dividend date the following week.

The potential dividend payers for the week are Bristol Myers Squibb (BMY), Medtronic (MDT) and Sysco (SYY).

Bristol Myers is a frequent holding and I currently own two lots, having saved one from assignment specifically because I wanted to retain the dividend this week. It has traded in a range recently as some good news about a drug used in the treatment of melanoma has lifted shares from the low end of that range that I believe may carry shares back toward the $52 range if the overall market doesn’t fade. 

Medtronic has been much in the news lately due to its proposed $43 billion buyout of Covidien (COV), an Ireland based company. While inversions are increasingly in our lexicon these days, this merger makes sense on more than just a tax basis.

Trading near its yearly highs isn’t generally a place I want to be when opening a position, but I don’t foresee any near term threat to Medtronic’s share price and it does offer a decent dividend, made more appealing if shares are assigned relatively quickly. 

Sysco is just one of those companies that is everywhere you probably don’t always want to be. It’s non-flashy, utilitarian and below the radar, yet it is fairly indispensable and reliable in terms of what if offers to a broad range of customers. Shares have only recently begun trading weekly and expanded weekly options and while offering a nice dividend and option premium, also offers some opportunity for share appreciation, as well.

Finally, Whole Foods (WFM) also goes ex-dividend on July 1, but purchasing for the purposes of capturing the paltry dividend may be as bad of an idea as it has been for me to have purchased shares in the past. I currently own shares and have watched them tumble as the company faced increasing competition, bad weather and significant expansion efforts. In addition, an occasional comment too many and too controversial by one of its co-CEOs does nothing to help it recover its former glory.

Whole Foods is one of those rare companies that has previously recovered its lost glory, although it did take nearly 7 years to return to its 2005 price peak. I don’t really have the kind of patience, but the extent of the climb isn’t as steep as in the past.

I think that it’s bad news is behind it and it has shown some stability at its current price. While I often like to purchase shares after a price drop, especially if I already own shares, I haven’t found the reason to do so with Whole Foods while watching its value erode.

Unless there’s a report coming from government agencies next week citing health hazards of organic food, I’m finally ready to add to my Whole Food holdings and may as well take that puny dividend for my troubles.

Traditional Stocks: DuPont, Holly Frontier, Verizon, Whole Foods

Momentum: Dollar General

Double Dip Dividend: Bristol Myers Squibb (7/1), Medtronic (7/1), Sysco (7/1)

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 – June 1, 2014

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

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

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend th
is week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings
loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – May 11, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

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

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – March 23, 2014

There was a time when the Chairman of the Federal Reserve did not hold press conferences.

In the past that would have been a very good thing, as the last Chairman to not have held press conferences, Alan Greenspan, was cryptic. When he did speak, such as during congressional testimony, he could send markets gyrating to opposite extremes before even having uttered a single verb. 

When Ben Bernanke succeeded him and introduced the concept of a regularly scheduled press conference people were thrilled with the idea that there would be a new era of transparency and an end to the use of words shrouded by their own opacity.

For the most part Ben Bernanke’s press conferences were yawners. Not because of a lack of interesting subject matter, but because the markets rarely reacted to any new insights and inadvertent slips of strategic policy intentions just weren’t going to come from someone who carefully measured every word.

Now it was Janet Yellen’s turn and there had even been talk of her holding such press conferences after each FOMC minutes release and not simply on an alternating monthly basis.

Yellen performed admirably, once you get over the fact that with your eyes closed she sounds like Woody Allen’s sister, never batting an eyelash when one questioner twice referred to the FOMC members as “you guys” and then herself once referred to the cultural phenomenon of “shacking up,” it was what she said or didn’t say or maybe meant or maybe didn’t mean that sent the market abruptly tumbling at 3:04 PM Wednesday afternoon.

What was learned was that in a world of imprecision, especially when discussing time frames, any lapse that leads to a more precise time frame can create reactions from people that claim to loathe uncertainty but are really more afraid of certainty. The very idea that interest rates might begin to rise as soon as 6 months from now as part of a strategic plan by the Federal Reserve was a momentary reason to panic.

But was it really because of what Janet Yellen said or more a case of traders going to a second or even third derivative of the consequences of whatever it is that she may have said or may have meant.

That seems like good enough reason to exercise the emotional part of a coherent investing strategy.

The market’s response this week showed that it is very much on edge and harbors a significant amount of nervousness, but it also shows impressive reparative ability. 

Over the past few weeks it is that reparative ability that has repeatedly been tested and repeatedly met the challenge. 

With continued challenges in mind, this week more of my attention is focused upon positions that may be less susceptible to a breakdown in the event of a market giving into some of the challenges that may await. While in recent weeks I haven’t been adverse to more risky or volatile positions, I once again find myself not being attracted to risk as the market is again near all time highs, despite its seeming resilience and resistance to challenges.

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).

The world of a stock analyst continues to confound me. On the one hand, I saw this week’s decline in shares of Bristol Myers Squibb (BMY) as an opportunity to consider bringing it back into my portfolio, particularly since I need additional healthcare representation. However, this week came a curious assessment from analysts at The Jeffries Group who raised their price target of shares to $48 and issued a “hold” rating on shares.

Since a $48 price target is about 10% below the Friday’s close, which itself is 8% lower than where shares started the month, it does beg a question or two. 

Rather than asking those questions, I like what appears to be an opportunity, having waited for shares to return to my comfort level. The fact that Bristol Myers will be paying a dividend shortly further encourages me to consider going for the trifecta; an increase in share value, an option premium and the dividend, during what is hoped to be a short period of ownership.

British Petroleum (BP) is another stock that has seen its shares fall about 8% this month. I haven’t owned shares since November 2012, but have been anxious to do so since that time, futilely hoping that it would return to the $43 level at which I had repeatedly traded its shares. Sometimes you may have to give up some hopes and perhaps come to the realization that after its 8% fall that may be the biggest gift that is to come. While its option premium is less rich than I would like the enticement of its dividend makes it one of those companies that I don’t mind owning for more than an occasional short term fling, particularly since it doesn’t appear to be poised to present undue risk, even in a falling market.

While British Petroleum may now seem to have much in the way of added risk, Holly Frontier (HFC) is not exactly be a prototypical stock to consider when looking to avoid risk. It certainly trades with some sudden and rapid moves in both directions and does so on a regular basis. Yet despite that kind of behavior it seems to also be very capable of finding its way back home. Having owned several times in the past few months and having just had shares assigned this past week, I’m interested in restoring them to my portfolio. The single caveat is that it is near the top of the range that I’ve had comfort initiating a position.

With the attentions of Nelson Peltz and Carl Icahn, Mondelez (MDLZ) and eBay (EBAY), respectively have seen their initial bursts of share appreciation moderate of late. Until Icahn came onto the scene eBay was one of my very favorite covered call trades as it
so reliably traded in a range. His sudden interest and unimaginative plan to spin off the PayPal unit was initially news divulged by eBay upon its earnings announcement and it shifted focus from mediocre performance to activist investing.

Following some fairly nasty exchanges, including a battle of words with Marc Andreessen, who sits on the board of eBay, the share price has started moderating a bit, having gone down approximately 5% from its peak earlier this month. That’s still on the high end of my trading range, but the interest is returning and would be greatly enhanced with any further drop.

Mondelez, on the other hand, has made some peace with its activist and its shares have stagnated ever since. As with eBay and so many other stocks, I like stagnation, especially if punctuated with occasional bursts of activity that keeps traders and especially potion buyers ion their toes. Mondelez goes ex-dividend this week and that has been a good time to consider entering into a new position or adding shares.

A Court of Appeals ruling on Friday regarding debit card swipe fees was greeted by differing levels of enthusiasm for shares of Visa (V) and MasterCard (MA) that appeared to adversely impact MasterCard well out of proportion to the favor found in Visa. Despite the acknowledged greater market share that Visa controls in the debit card area, analysts predominantly noted an incremental benefit to MasterCard as well, however its shares fell sharply, placing it back in the attractive price range

LuLuLemon Athletica (LULU) reports earnings this week. With a new clothing line recently released and with new leadership, as an existing shareholder with much more expensively priced shares, my hope is that they will provide guidance that casts an optimistic light on its future fortunes. No stranger to large earnings related moves there is, however, the possibility that this earnings report could be the kind that a new CEO often uses for advantage by dumping all of the bad news and dead weight so that, by comparison, future earnings reports are glowing and reflect upon the new CEO.

The option market is implying a 10.5% move when earnings are announced. By some of its own historical standards that may be an understatement of what its shares are capable of doing and the direction has been predominantly on the downside. The 1% ROI that may be able to be obtained even with a 14% drop in share price may make that risk worthy for some, especially if you believe, as I do, that this earnings report will be greeted in a positive manner.

Family Dollar Stores (FDO) has not had a good month ever since a downgrade to “sell” and disappointing earnings from Dollar General (DG). Now near its yearly lows volatility has returned to its option premiums helping to balance the risk that may be associated with this purchase, despite its historically low beta level. I already own shares and have been fighting back its price drop by attempting to take advantage of that enhanced option premium. While there may be some disagreement about what an improving retail sector means for the lower echelon of retailers, such as Family Dollar Store, I subscribe to the “high tide theory” particularly since economic recovery is leaving many behind and increasingly tethered to the lower echelon of retail.

Other than being named as one of the world’s most ethical companies, there really was no other bad news to have accounted for International Paper (IP) being unable to capitalize on the market’s advance this week. It’s current price places it close to the lower end of its trading range and makes it increasingly appealing to own. With more spin-offs of its assets planned within the next few months in pursuit of a successful strategy that has seen a number of such assets spun off, International Paper has created and optimized value without the need for outside agitation and has been a good candidate for a covered option strategy in the past year.

Finally, GameStop (GME) reports earnings this week. It received a blow to its share price when Wal-Mart (WMT) announced that it was encroaching on GameStop’s core business by offering to exchange Wal-Mart shopping credit for used video games. Whether Wal-Mart believes that they have a potentially profitable product line in used video games or simply plan to use customer entry into the stores as a means of enticing them toward other Wal-Mart purchases isn’t clear, but I think that impact on GameStop will be far less than the market has already assigned.

Wal-Mart, priding itself on offering the lowest prices, isn’t likely to offer the highest prices on its game repurchases. Secondly, only the most desperate of families is going to garnish their kid’s video games, which through some tradition have become the property of kids to do with as pleased and then trade them in for a chance for even more Wal-Mart goods. The rightful owners of those games, the kids, are going to need a really compelling reason to go into Wal-Mart.

Adult gamers, on the other hand, may not have enough energy to re-direct their inertia and change their game swapping habits.

The option market is implying a 5.5% move upon earnings release and GameStop is certainly no stranger to large price swings. However, the sale of a put option at a strike price about 11% below Friday’s closing price can still return a weekly ROI of 1%. That’s the sort of fun that could have me easily glued to the ticker crawl on my stock screen.

 

Traditional Stocks: Bristol Myers Squibb, British Petroleum, eBay, Family Dollar Store, Holly Frontier, International Paper, MasterCard

Momentum Stocks: none

Double Dip Dividend:  Mondelez (3/27)

Premiums Enhanced by Earnings: GameStop (3/27 AM), LuLuLemon Athletica (3/27 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.