Weekend Update – August 30, 2015

Good luck to you if you have staked very much on being able to prove that you can make sense of what we’ve been seeing in the US stock market.

While it’s always impossible to predict what the coming week will bring, an even more meaningful tip of the hat would go to anyone that has a reasonable explanation of what awaits in the coming week, especially since past weeks haven’t necessarily been simple to understand, even in hindsight.

Sure, you can say that it’s all about the confusion over in China and the series of actions taken to try and control the natural laws of physics that describe the behavior of bubbles. You can simply say that confusion and lack of clear policy in the world’s second largest economy has spilled over to our shores at a time when there is little compelling reason for our own markets to make any kind of meaningful move.

That appears to be a reasonable explanation, in a case of the tail wagging the dog, but the correlation over the past week is imperfect and not much better over the past 2 weeks when some real gyrations began occurring in China.

The recovery last week was very impressive both in the US and in China, but in the span of less than 2 months, ever since China began restrictions on stock trading activity, we can point to three separate impressive recoveries in Shanghai. During that time the correlation between distant markets gets even weaker.

Good luck, then, guessing what comes next and whether the tail will still keep wagging the dog, now that the dog realizes that a better than expected GDP may be finally evidencing the long expected energy dividend to help boost consumer participation in economic growth.

Sure, anyone can say that a 10% correction has been long overdue and leave it at that, and be able to hold their head up high in any argument now that we’ve been there and done that.

There has definitely not been a shortage of people coming out of the woodwork claiming to have gone to high cash positions before this recent correction. If they did, that’s really admirable, but it’s hard to find many trumpeting that fact before the correction hit.

What would have given those willing to disengage from the market and go to cash following unsuccessful attempts to break below support levels a signal to do so? Those lower highs and higher lows over the past month may have been the indication, but even those who wholeheartedly believe in technical formations will tell you that acting on the basis of that particular phenomenon has a 50-50 chance of landing you on the right side.

And why did it finally happen now?

The time has been ripe for about 3 years. I’ve been continually wrong in that regard for that long and I certainly can’t hold my head up very high, even if I had gotten it right this time.

Which I didn’t. But being right once doesn’t necessarily atone for all of the previous wrong calls.

No sooner had the chorus of voices come together to say that the character and depth of the decline seen were increasingly arguing against a V-shaped recovery that the market now seems to be attempting that V-shaped recovery.

What tends to make the most sense is simply considering taking a point of view that’s in distinct contrast to what people clamoring for attention attempt to build their reputations upon and are equally prepared to disavow or conveniently forget.

Of course, if you want to add to the confusion, consider how even credible individuals see things very differently when also utilizing a different viewing angle of events.

Tom Lee, former chief US equity strategist for JP Morgan Chase (NYSE:JPM) and founder of Fundstrat Global, who is generally considered bullish, notes that history shows that the vast majority of 10% declines do not become bear markets.

Michael Batnick, who is the director of research at Ritholtz Wealth Management, looked at things not from the perspective of the declines, but rather from the perspective of the advances seen.

His observation is that the vast majority of those declines generally occurred in “not the healthiest markets.”

Not that such data has application to events being seen in China, but it may be worthwhile to make note of the fact that the tremendous upside moves having recently been seen in China have occurred in the context of that market still having dropped 20%.

Perhaps not having quite the same validity as laws of physics, it may make some sense to be wary of the kind of moves higher that bring big smiles to many. If China’s stock market can still wag the United States, even with less than perfect correlation, there’s reason to be circumspect not only of their continued attempts to defy natural market forces, but also of that market’s behavior.

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

While I’m among those happy to have seen the market put 2 consecutive impressive gains together, particularly after the failed attempt to bounce back from a 600+ point loss to begin the week, I don’t think that I’ll be less cautious heading into this week.

I did open 2 new positions last week near the market lows, and despite their performance am still ambivalent about those purchase decisions. For each, I sold longer term contracts than would be my typical choice, in an attempt to lock in some volatility induced premiums and to have sufficient time for price recovery in the event of a short term downturn.

With an unusually large number of personal holdings that are ex-dividend this week, I may be willing to forgo some of the reluctance to commit additional capital in an effort to capture more dividend, especially as option premiums are being enhanced by volatility.

Both Coach (NYSE:COH) and Mosaic (NYSE:MOS) are ex-dividend this week.

For me, both also represent long suffering existing positions that I’ve traded many times over the years, and have been accustomed to their proclivity toward sharp moves higher and lower.

However, what used to be relatively short time frames for those declines have been anything but that for some existing lots, even as having traded other lots at lower prices.

Since their previous ex-dividend dates both have under-performed the S&P 500, although the gap has narrowed in the past month, even as both are within reach of their yearly lows.

On a relative basis I believe that both will out-perform the S&P 500 in the event of the latter’s weakness, but may not be able to keep pace if the market continues to head higher. However, for these trades and unlike having used longer term contracts with trades last week, my eyes would be focused on a weekly option and would even be pleased if shares were assigned early in an effort to capture the dividend.

That’s one of the advantages of having higher volatility. Even early assignment can be as or more profitable than in a low volatility environment and being able to capture both the premium and dividend, when the days of the position being open are considered.

Despite having spent some quality time with Meg Whitman’s husband a few months ago, I had the good sense not to ask him anything a few days before Hewlett Packard (NYSE:HPQ) was scheduled to report earnings.

That would have been wrong and no one with an Ivy League legacy, that I’ve ever heard about, has ever crossed that line between right and wrong.

While most everyone is now focusing on the upcoming split of Hewlett Packard, my focus is dividend centric. As with Coach and Mosaic, the option premium is reflecting greater volatility and is made increasingly attractive, even during an ex-divided event.

However, since Hewlett Packard’s ex-dividend date is on Friday, there is less advantage in the event of an early assignment. That, though, points out another advantage of a higher volatility environment.

That advantage is that it is often better to rollover in the money positions, with or without a dividend in mind, than it is to accept assignment and to seek a new investment opportunity.

In this case, if faced with likely early assignment, I would probably consider rolling over to the next week and at least if still assigned early, then would be able to pocket that additional week’s option premium, which could become the equivalent of having received the dividend.

For those who are exceptionally daring, Joy Global (NYSE:JOY) is also ex-dividend this week and it is another of my long suffering positions.

These days, anything stocks associated with China have additional risk. For years Joy Global was one of a very small number of stocks that I considered owning that had large exposure to the Chinese economy. I gave considerably more credibility to Joy Global’s forecasting of its business in China than to official government reports of economic growth.

The daring part of a position in Joy Global has more to do with just having significant interests in China, but also because it reports earnings the day after going ex-dividend. I generally do stay away from those situations and much prefer to have earnings be release first and then have the stock go ex-dividend the following day.

In this case, one can consider the purchase of shares and the sale of a deep in the money weekly call option in the hopes that someone might consider trying to capture the dividend and then perhaps selling their shares before exposure to earnings risk.

In such an event, the potential ROI can be 1.1% if selling a weekly $22 call option, based upon Friday’s $24.01 close.

However, if not assigned early, the ROI becomes 1.8% and allows for an 8% price cushion in the event of the share’s decline, which is in line with the option market’s expectations.

For those willing to cede the dividend, there is also the possibility of considering a put sale in advance of earnings.

The option market is implying only an 8.1% move next week. However, it may be possible to achieve a 1% return for the sale of a weekly put that is at a strike price 12.5% below Friday’s closing price.

Going from daring to less so, I purchased shares of $24.06 shares General Electric (NYSE:GE) last week and sold longer dated $25 calls in an effort to combine premium, capital gains on shares and an upcoming ex-dividend date.

Despite the shares having climbed during the course of the week and now beyond that strike level, I may be considering adding even more shares, again trying to take advantage of that combination, especially the higher than usual option premium that’s available.

General Electric hasn’t yet announced that ex-dividend date, but it’s reasonable to expect it sometime near September 18th. While my current short call position is for October 2, 2015, for this additional proposed lot, I may consider the sale of a September 18 slightly out of the money option contracts.

In the event that once the ex-dividend date is announced and those shares are in jeopardy of being assigned early, I might consider rolling over the position if volatility allows that to be a logical alternative to assignment.

Finally, as long as Meg Whitman is on my mind, I’m not certain how much longer I can go without owning shares of eBay (NASDAQ:EBAY). While it has traded in a very consistent range and very much paralleling the performance of the S&P 500 over the past month, it is offering an extremely attractive option premium in addition to some opportunity for capital gains on shares.

The real test, of course, begins as it releases its next earnings report which will no longer include PayPal’s (NASDAQ:PYPL) contributions to its bottom line. That is still 6 weeks away and I would consider the purchase of shares and the sale of intermediate term option contracts in order to take advantage of that higher market volatility induced premium.

At least that much makes sense to me.

Traditional Stock: eBay, General Electric

Momentum Stock: none

Double-Dip Dividend: Coach (9/3 $0.34), Hewlett Packard (9/4 $0.18), Joy Global (9/2 $0.20), Mosaic (9/1 $0.28)

Premiums Enhanced by Earnings: Joy Global (9/3 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 stre
am for the week, with reduction of trading risk.

Weekend Update – December 14, 2014

On a cruise ship you only know the answer to the question of “How low can you go” once you’ve met the physical limits of your body and the limit of your ability to balance yourself.

Other than losing a little self-respect, maybe a little embarrassment in front of a bunch of drunken strangers, there’s not too much downside to playing the game.

When it comes to the price of oil the answer isn’t so clear, mostly because the answer seemed so clear for each of the past few weeks and has turned out to be anything other than clear. Besides the lack of clarity, the game has consequences that go well beyond self-respect and opening yourself up to embarrassment.

While we all know that at some point the law of “Supply and Demand” will take precedence over the intrusion of a cartel, the issue becomes one of time and how long it will take to set in motion the actions that are in response to the great opportunities created by low cost energy.

Until a few days ago we thought we were in recently uncharted territory, believing that the reduction in oil prices was due to an increase in supply that itself was simply due to increasing production in the United States.

However, with Friday’s release of China’s Industrial Production data, as well as an earlier remark by a Saudi Arabian Oil Minister, there was reason to now believe that the demand side of the equation may not have been as robust as we had thought.

While there’s not a strong correlation between sharply declining oil prices and recession, that has to now be considered, at least for much of the rest of the world.

The United States, on the other hand, may be going in a very different direction as is the rest of the world, until such factors as the relative strength of the US dollar begin to catch up with our good fortunes, as an example of yet another kind of cycle that has real meaning on an every day basis in an ever more inter-connected world.

While there may not be a substantive decoupling between the US and other world economies, at the moment all roads seem to be leading to our shores and cheap oil can keep that road a one way path longer than is usually the case with economic cycles.

When considering the amount of evil introduced into the world as a result of oil profits supporting nefarious activities and various political agenda in countries many of us never even knew existed, the idea that energy self-reliance is paramount strategically becomes tangible. It also should make us wonder why we’ve essentially ignored doing anything for the past 40 years and why we would delay, even for another second the ability to break free from a position of submissiveness.

While most free market capitalists don’t like the idea of a government hand, there is something to be said for government support of US oil production and exploration activities particularly when they are suffering from low prices due to their successes and might have to curtail activity, as some in the world would like to see.

Insofar as the success of US producers adds to the tools with which we may face the rest of the sometimes less than friendly world, there is reason for our government to act as an anti-cartel a
t times and keep prices artificially low, while protecting local producers from short term pain they endure that helps to make the nation lass susceptible to pressures from other nations who are more than happy to control our destiny.

Great time to increase the Strategic Petroleum reserve, anyone?

In the meantime, though, that pain is being shared among investors in most every sector, as the volatility index, which usually moves in a direction opposite the market, is again moving higher as it has a habit of doing every two months, or so.

As an option seller that’s one bar I like seeing moved higher and higher, until someone asks the obvious question”

“How high will it go?”

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

From just about every perspective the stocks considered this week reads as a “Who’s Who of Losers.”

Sometimes there are good reasons, other times the reasons aren’t quite as clear, but even as oil prices may be playing a game of “how low can you go,” individual stocks across all sectors are being taken along for a nasty ride, that thus far has been nothing more than a 3.5% move from its recent high.

McDonalds (NYSE:MCD) is an example of a stock that continually finds itself on the wrong side of $100 and periodically finds itself on the wrong side of public opinion, as well. At the moment, it’s on the wrong side of each of those challenges and there is probably an association between the two.

While the news can get worse for McDonalds, a DJIA component, as it releases more US and international sales data, it is finally doing something that its franchisees have been wanting for quite a while, as it returns to some sense of simplicity in its menu. That simplicity will help reign in costs that can then reign in customers who have to balance cost and health consciousness.

Another DJIA component, Verizon (NYSE:VZ) also had a bad week, as it lowered profit forecasts and is feeling the pain of its competition with other carriers. It is also feeling the pain of underwriting the true costs of the wildly popular iPhone 6.

Having patiently waited for shares to return to the $47.50 level, it breezed right through that, heading straight to its low point for 2014.

With an upcoming dividend and option premiums increasing along with the volatility of its share price, Verizon is again becoming appealing, although there will be the matter off those earnings next month, that we’ve already been warned about, but are still likely to come as a surprise when reality hits.

Yet another DJIA component, Caterpillar (NYSE:CAT) was on everyone’s “worst company and worst CEO” list and was even famously Jim Chanos’ short of the year back in July 2013. As most know, shares have traded well above those July 2013 levels and even with its recent 20% decline, it is still well above those levels.

While Caterpillar has some Chinese exposure there is often a reaction that is out of proportion to that exposure and that brings opportunity. I have long liked shares at $85, but it has been a long time since that level has been seen, much to Jim Chaos’ dismay. On the other hand, $90 may be close enough to consider initiating a position following this most recent round of weakness.

While EMC Corporation (NYSE:EMC) isn’t close to being a member of the DJIA it certainly wasn’t shielded from the losses, as it fell 6.5% on the week that was harsh to the technology sector, despite it being difficult to draw a straight line connecting oil and technology sectors.

Just a week or two ago I was willing to buy EMC shares at $30, but now, as with so many stocks, the question of “how low will it go?” must be raised, even if there is no logical reason to suspect anything lower, as long as it’s majority owned VMWare (NYSE:VMW) can do better than a 12% decline for the week.

The China story is reflected in 3 stocks highlighted this week and none of the stories are very good. Neither Joy Global (NYSE:JOY), Las Vegas Sands (NYSE:LVS) nor YUM Brands (NYSE:YUM) had very good weeks, as a combination of stories from China struck at the core of their respective businesses.

Las Vegas Sands goes ex-dividend this week and despite its name, has significant interests in Macao. The gaming news coming from Macao has been a stream of negativity for the past 4 months, including such issues as the impact of smoking bans on casino income.

I already own 2 lots of Las Vegas Sands and have traded in and out of some additional lots these past few months, It’s Chinese exposure certainly has risk at the moment, but the dividend and premiums at this very low price level can serve as a good entry point or even to average down on existing shares.

YUM Brands has had years of experience in the Chinese marketplace and has had numerous challenges and obstacles come its way. Public health scares of airborne diseases, tainted food supplies and more, in addition to the normal cycles that economies go through.

Somehow, YUM Brands has been able to survive an onslaught of challenges, although it has been relatively slow in boun
cing back from the latest food safety related issue. It lowered its profit forecasts this past week and took a very large hit, however, it subsequently recovered about half of the loss during the final two days of the week when the broader market was substantially lower.

Joy Global reports earnings next week and tumbled on Friday upon release of Chinese government data. The drop would seem consistent with Joy Global’s interests in China. However, what has frequently been curious is that Joy Global often paints a picture of its activity and importantly its forward activity in a light different from “official” government reports.

Following Friday’s pessimistic report from China, Joy Global plunged to its 5 year low in advance of earnings. Ideally, that is a more favorable condition if considering a position in advance of earnings, particularly if selling puts, as the concern for further drops can amplify the premiums on the puts and potentially provide a more appealing entry point for shares.

Blackberry (NASDAQ:BBRY) also reports earnings next week and it, too, has fallen significantly in the past month, having declined nearly 20% in that time.

I’m not really certain that anyone knows what its CEO John Chen has in mind for the company, but most respect his ability to do something constructive with the carcass that he was left with, upon arriving on the scene.

My intuition tells me that his final answer will be a sale to a Chinese company, as a last resort, and that will understandably be met with lots of resistance on both security and nationalism concerns. Until then, there’s always hope for making some money from the shares, but once that kind of sale is scuttled, the Blackberry story will have sailed.

For now, however, the option market is implying an 11.6% move in shares upon earnings news. Meanwhile, a 1.5% weekly ROI can be achieved through the sale of puts if shares do not fall more than 15%

Finally, after nothing but horrid news from the energy sector over the past weeks, at some point there comes a time when it just seems appropriate to pull the trigger and commit to a turnaround that is hopefully coming sooner, rather than later.

There is no shortage of names to choose from among, in that regard, but the one that stands out for me is the one that was somewhat ahead of the curve and has taken more pain than others, by virtue of having eliminated its dividend, which had been unsustainably high for quite a while.

Seadrill (NYSE:SDRL) is now simply an offshore drilling and services company, that is beleaguered like all of the rest, but not any longer encumbered by its dividend.

What it offers may be a good example of just how low something can go and still be a viable and respectable company, while offering a very attractive option premium that reflects the risk or the opportunity that is implied to come along with ownership of shares.

Although the bar on Seadrill’s price may still be lowered if more sector bad news is forthcoming, Seadrill may also be the first poised to pop higher once that
cycle reawakens.

Traditional Stocks: Caterpillar, EMC Corporation, McDonalds, Verizon

Momentum: Seadrill, YUM Brands

Double Dip Dividend: Las Vegas Sands (12/16 $0.50)

Premiums Enhanced by Earnings: Joy Global (12/17 AM), Blackberry (12/19 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.

Weekend Update – November 16, 2014

The past week was one of the quietest ones that could have been imagined.

The biggest stories of the week were the broken scaffolding that left two window washers dangling on the edge of the new “One World Trade Center” and the successful landing of Rosetta on a faraway comet after a 10 year mission.

With the exception of a late in the week rumor of a buyout of one oilfield services company by another, there really was nothing to propel markets as it was an extraordinarily quiet week on the economic news front, only slightly punctuated by a relatively obscure statistic that suddenly may be an important one in the coming months.

Years ago the single most important economic report came on a weekly basis. If anyone remembers all the way back to the 1980s you may recall how everyone waited for Thursdays and the release of the “M2 Money Supply” statistic.

If you do remember that you may also remember the inflation in the 1980s and can understand why M2 was watched so closely. Inflation was “Enemy #1” and the M2 Supply was linked to that evil. At one time M2 was used by the Federal Reserve to steer the economy in attempting to avoid a renewed bout of inflation.

You don’t hear much talk about M2 anymore as it was replaced by a more direct reliance on interest rates, especially the “Fed Funds Rate.” We still care about interest rates, but sometimes a little too much. Right now we seem overly concerned about when the Federal Reserve will begin to finally increase interest rates forgetting how that which helps to bring about inflation is exactly what we’ve been pining for a sign of the economy finally getting some footing.

This week we finally heard about something that wasn’t really new but got lots of comments and focus. Just a few months ago Federal Reserve Chairman Janet Yellen suggested that we should start paying more attention to the “quit rate” that was included in the “Job Openings and Labor Turnover Summary” also known as the “JOLT” Summary.

That acronym may be very unintentionally appropriate, as sometimes a jolt is exactly what’s needed to get things back into gear.

While many fight over whether the monthly Employment Situation Report should be looked at through the lens of the “U-6” measure of employment, Yellen is suggesting that the decision of people to quit their jobs in the belief that they can now land another, presumably better paying job, is telling of an economy that is heading in the right path and that will introduce some wage inflation.

That’s the kind of jolt this economy has needed. Not just more jobs, but better paying jobs that allow consumers to begin consuming again. Instead of fearing inflation, there should be some realization that a degree of inflation is exactly what this economy has needed for a long time.

One of my sons will likely be included in the next “JOLT” Summary, as he quit a job in which he was more of a low priced commodity and started on a new and much better paying job. He also bought a new car that week.

See how it works? It’s all about the discretionary spending. That’s what really fuels everything, as part of a virtuous cycle of jobs and consumerism.

Given the mixed results reported by some major retailers this week there definitely needs to be some enhancements to the top line and the only thing that can bring that about is an energized consumer jolted back to life.

For anyone that has been either on the receiving end or delivery end of paddles that are meant to jolt you back to life you know just how important that kick start is, but you also know that too much of a good thing brings its own problems.

Having been witness to the late 1970s and early 1980s there is certainly a degree of hesitance when inflation enters into the equation, but somewhere there may be a person in a position to steer the economy who understands that the extremes of the continuum aren’t the only possible outcomes.

Janet Yellen gives all indications of being the person who can jolt and withdraw jolt as signs of economic life warrant.

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

Another company bound to benefit from any improvement in employment, especially the kind that results in increased ability to engage in discretionary spending is Fastenal (FAST). This is a company that I’ve come to look at as a reflection of the real economy and while it has traded in a very narrow range it has been an excellent covered call trade.

It simply sells those things that are measures of economic development and expansion to both other business, middlemen and do it yourself kind of people. What they sell reflects a wide and varied kind of activity. They sometimes have q habit of providing revised guidance a few weeks before earnings and those occasional surprises help to create a reasonable option premium in advance of earnings, in addition to the enhancement that may come with earnings.

Dow Chemical (DOW) had a few false starts this week, jumping significantly higher and then giving back much of the gains on successive days. Those moves came before and after the announcements of additional share buybacks and an increased dividend. Shares closed up nicely on Friday continuing the hesitant optimism of earlier in the week, after having fallen from its highs of the day, only to rally back in an otherwise mediocre tape.

Add into the mix the presence of an activist investor and a long tenured CEO that is as tough as he can be charming and you have the makings of a company that will continue seeing pressures from both sides in support of shares, even though that may be a by-product of a more personal kind of battle. However, as a shareholder, you don’t necessarily care how you get to your objective, as long as you get there. Having some entertainment accompany the journey can just be an added bonus.

Joy Global (JOY) is another of these companies that trades with quite a bit volatility and is highly levered to activity in China, as well as to the veracity of reports from China. None of those are particularly endearing qualities, but Joy Global has been a company that routinely bounces back from disappointment over prospects of slowdowns in Chinese construction and infrastructure activity. It will report earnings in just a few weeks and will also be ex-dividend prior to that, so there are some events that have to be considered if entering into a new position, particularly if hoping for a quick exit.

While the majority of the systemically important companies have already reported earnings, there are quite a few of the more highly volatile companies reporting earnings this week. Among those that have caught my attention for this week are Best Buy (BBY), GameStop (GME), Green Mountain Keurig (GMCR) and salesforce.com (CRM).

Rather than considering any of them on the basis of their fundamental businesses, strengths or challenges awaiting them, I see them as potential opportunities based only on their recent price behaviors.

One thing that they all have in common is that they’ve all had recent runs higher in price. Another thing that they have in common, befitting the level of risk associated with their upcoming earnings is very high option premiums.

In order to achieve a 1% ROI on the sale of put contracts Best Buy, GameStop, Green Mountain Keurig and salesforce.com could still fall by approximately 9.2%, 21.3%, 10.5%, and 7%, respectively without assignments of puts sold. Meanwhile, their respective implied volatilities are 7.5%, 12%, 8.8% and 6.2%.

However, another thing that they share in common, at least from my perspective is that due to their recent runs higher, they may be prone to even harder falls than those implied moves might indicate. For that reason, I’m more inclined to consider the sale of puts after earnings for any of those companies that may in fact fall hard upon their releases, especially for salesforce.com, which offers the least amount of cushion between the implied move and the strike at which the ROI objective is attained.

On the other hand, GameStop offers the greatest cushion, so may be one to consider the sale of put options prior to earnings. As always, the sale of puts may require some additional attention, especially if hoping to avoid assignment if share price goes below the strike level selected.

Finally, it may be yet another week to think about Twitter (TWTR). Whether using the service or not, there’s no denying that it is a company whose stock is in search of direction, very much as many believe its company is in need of direction.

While no one has been criticizing the company on the basis of its earnings there is certainly lots of confusion about what Twitter plans to be and how it will get there, especially if it can’t decide on how to measure its activities and relate those to revenues.

This past week put the Twitter story into focus. Shares soared at its first analysts day meeting, up about 10% until Standard and Poor’s delivered an unsolicited credit report on the company, placing it at a “junk” level designation.

Granted, that S&P, by virtue of having performed an unsolicited analysis didn’t have access to the same company records as it ordinarily does when assessing a company’s credit worthiness, but the market immediately reversed course and sent shares sharply lower.

As was the case last week, I already had sold Twitter puts. I rolled those over on Thursday as Twitter was falling sharply and mat sell even more puts this week, particularly if there is some opening weakness to begin the week.

For anyone following this trade, it is one that may see lots of ups and downs and may require more maintenance, particularly in deciding whether to roil over puts to a forward week or take assignment in the event of adverse movement, but it can be a serially satisfying trade. Friday’s bounce again higher, perhaps after the realization that the S&P rating may have been based on incomplete information, may simply be one of many bounces ahead.

Traditional Stocks: Dow Chemical, Fastenal

Momentum: Joy Global, Twitter

Double Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (11/20 AM), GameStop (11/20 AM), Green Mountain Keurig (11/19 PM), salesforce.com (11/19 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.

Weekend Update – October 26, 2014

It’s too bad that life doesn’t come with highly specific indicators that give us direction or at least warn us when our path isn’t the best available.

Parents are supposed to do that sort of thing, but in real life the rules are pretty simple. You don’t go swimming for 30 minutes after a meal, you don’t kill people and you don’t swallow your chewing gum.

The seven additional commandments are really just derivative of those critically important first three.

Knowing the difference between right and wrong gives one the ability to change direction when getting too close to what is known to be on the wrong side of what society finds acceptable. Most people get the concept and also apply it to their personal safety.

In stock investing it’s not that simple, although there are lots of rules and all kinds of advance warning signals that may or may not work, depending on whether you were giving or receiving the information. As opposed to adolescents who eventually become adults and lose the “it can never happen to me” mentality, investors often feel a sense of immunity from what may await just beyond that point that others would avoid.

It would have been really, really nice if there was some kind of warning system that both alerted us to an upcoming decline and especially the fact that it would be abruptly followed by a reversal.

Much has been said about the various kinds of recoveries that can be seen, but if this most recent bounce higher will in fact be the recovery to the nearly 9% drop on an intra-day basis, then it is certainly of the “V-shape” variety.

This week came word that by a very large margin the activity in personal 401(k) retirement accounts had been to move out of equities, after the declines, and into fixed income instruments, after those interest rates had seen a 15% increase.

What may really complicate things is that there really is no society to provide guidance and set the boundaries. There are short sellers who like to see movement in one direction and then there are the rest of us, although we can all change those roles at any moment in time that seems to suit us.

For those that depended on the “key reversal” of a few weeks ago as a sign to buy or dipping below the 200 day moving average as a sign to sell, the past few weeks have frustrating.

On the other hand, news of rampant selling in 401(k) accounts may offer precisely the kind of prognostic indicator that many have been looking for, as being a perfectly contrarian signal and indication that the time to buy had come once again.

But what caused the sudden change that created the “V shape?”

Technicians and chart watchers will point to the sudden reversal seen on October 15th in the early afternoon as the DJIA had fallen more than 400 points. However, that 260 point mid-day reversal was lost, almost in its entirety at the following morning’s opening bell.

However, we may also want to thank serendipity that IBM (IBM) and Coca Cola (KO) didn’t report their earnings last week, and that reports of a New York City Ebola patient didn’t surface until market and contagion fears had abated.

It wasn’t until the afternoon following that 400 point drop that St. Louis Federal Reserve Governor James Bullard suggested that the Federal Reserve should consider delaying its ending of Quantitative Easing.

If you were looking for a turning point, that was it.

Even those that are critical of the Federal Reserve for its QE policies have been happy to profit from those very same policies. The suggestion that QE might continue would be a definite reason to abandon fear and buy what appear to be bargain priced stocks, especially as the fixed income side’s sudden 15% increase in rates made bonds less of a bargain..

I was either flatfooted or disbelieving in the sudden climb higher, not having made any new purchases for the second consecutive week. I was almost ready to make some purchases last Thursday, following what Wednesday’s decline, but that was followed by a 120 point gap up the following morning. Instead of adding positions I remained content to watch fallen asset values recapture what had been lost, still in the belief that there was another shoe to drop while en-route perhaps to a “W-shape”

That other shoe may come on Wednesday as the FOMC releases its monthly statement. Lately, that has been a time when the FOMC has given a boost to markets. This time, however, as we continue so consumed by the nuances or changes in the wording contained in the statement, there could be some disappointment if it doesn’t give some indication that there will be a continuing injection of liquidity by the Federal Reserve into markets.

If Bullard was just giving a personal opinion rather than a glimpse into the majority of opinion by the voting members of the FOMC there may be some price to be paid.

While there will be many waiting for such a word confirming Bullard’s comments to come there also has to be a sizable faction that would wonder just how bad things are if the Federal Reserve can’t leave the stage as planned.

Welcome back to the days of is good news bad news.

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

While the move higher this week was more than impressive, there’s still no denying that these large moves higher only happen in downturns. The question that will remain to be answered is whether the very rapid climb higher from recent lows will have any kind of sustainability.

For the coming week I expect another quiet one, at least personally. The markets may be anything but quiet, as they certainly haven’t been so for the past few weeks, but trying to guess where things may go is always a dicey prospect, just seemingly more so, right now.

Despite what may be continuing uncertainty I have increased interest in earnings related and momentum stocks in the coming week.

Among those is Joy Global (JOY) a stock whose fortunes are closely aligned with Chinese economic growth. Those prospects got somewhat of a boost as Caterpillar (CAT) delivered better than expected earnings during a week that was a cavalcade of good earnings, despite some high profile disappointments. While the S&P 500 advanced 4.1% for the week and Caterpillar rose 4.6%, Joy Global may just be warming up following only a 2.1% climb higher, but still trading well below its mean for the past year.

In that year it has generally done well in recovering from any downward moves in price and after two months in that kind of trajectory may be ready to finally make that recovery.

With “old technology” continuing to do well, EMC Corp (EMC) held up surprisingly well after its majority owned VMWare (VMW) fell sharply after its own earnings were announced. EMC typically announces its earnings the morning after VMWare announces and while showing some impact from VMWare’s disappointment, rapidly corrected itself after its own earnings were released.

EMC has simply been a very steady performer and stands to do well whether staying as an independent company, being bought out pr merged, or spinning off the large remainder of its stake in VMWare. Neither its dividend nor option premium is stunning, but there is a sense of comfort in its stability and future prospects.

Halliburton (HAL) has been trading wildly of late and is well below the cost of my most recent lot of shares. WHile the entire energy sector has fallen on some hard times of late, there’s little reason to believe that will continue, even if unusually warm weather continues. Halliburton, as have others, have been down this path before and generally investors do well with some patience.

That will be what I practice with my more expensive lot. However, at its current price and volatility, Halliburton, with its just announced dividend increase offers an exceptional option premium that is worthy of consideration, as long as patience isn’t in short supply.

Another stock having required more patience than usual has been Coach (COH). It reports earnings this week and as has been the case over the past 3 years it wouldn’t be unusual to see a large price move in shares.

The options market is expecting a 7% move in shares, although in the past the moves have been larger than that and very frequently to the downside. Lately, however, Coach seems to have stabilized as it has gotten a reorganization underway and as its competitor in the hearts and minds of investors, Michael Kors (KORS) has also fallen from its highs and stagnated.

The current lot of shares of Coach that I purchased were done so after it took a large earnings related decline and I didn’t believe that it would continue doing so. This time around, I’m likely to wait until earnings are announced and if shares suffer a decline I may be tempted to sell puts, with the objective of rolling over those puts into the future if assignment appears to be likely.

For those that like dabbling in excitement, both Facebook (FB) and Twitter (TWTR) announce their earnings this week.

< span style="font-size: medium;">I recently came off an 8 month odyssey that began with the sale of a Twitter put, another and another, but that ultimately saw assignment as shares dropped about $14. During that period of time, until shares were assigned, the ROI was just shy of 25%. I wouldn’t mind doing that again, despite the high degree of maintenance that was required in the process.

The options market’s pricing of weekly options is implying a price movement of about 13% next week. However, at current premiums, a drop of anywhere less than 18% could still deliver a weekly ROI of about 1.2%. I look at that as a good return relative to the risk undertaken, albeit being aware that another long ride may be in store. Since Twitter is, to a large degree, a black box filled with so many unknowns, especially regarding earnings and growth prospects, even that 18% level below could conceivably be breached.

Facebook seems to have long ago quieted its critics with regard to its strategy and ability to monetize mobile platforms. In the 2 years that it has been a publicly traded company Facebook has almost always beaten earnings estimates and it very much looks like a stock that wants to get to $100.

The option market is implying a much more sedate 7.5% in price movement upon earnings release and the decline cushion is only about 9.5% if one is seeking a 1% ROI.

Both Facebook and Twitter are potentially enticing plays this coming week and the opportunities may be available before and after earnings, particularly in the event of a subsequent share decline. If trying to decide between one or the other, my preference is Twitter, as it hasn’t had the same upside move, as Facebook has had and I generally prefer selling puts into price weakness rather than strength.

After some disappointing earnings Ford Motor (F) goes ex-dividend this week. Everyone from a recent Seeking Alpha reader who commented on his Ford covered call trade to just about every talking head on television is now touting Ford shares.

Normally, the latter would be a sign to turn around and head the other way. However, despite still being saddled with shares of a very beleaguered General Motors (GM), I do like the prospects of Ford going forward and after a respite of a few years it may be time to buy shares again. The dividend is appealing and more importantly, appears to be safe and the option premiums are enough to garner some interest as shares are just slightly above their yearly low.

Finally, I don’t know of anyone that has anything good to say about Abercrombie and FItch (ANF), regardless of what the perspective happens to be. It, along with some other teen retailers received some downgrades this past Friday and its shares plummeted.

I have lost count of how often that’s been the case with Abercrombie and FItch shares and I’ve come to expect them to rise and plunge on a very regular basis. If history is any guide Abercrombie and Fitch will be derided for being out of touch with consumers and then will surprise everyone with better than expected earnings and growth in one sector or another.

I’ve generally liked to jump on any Abercrombie post-plunge opportunity with the sale of puts and while I’d be inclined to roll those over in the event of likely assignment, I wouldn’t be adverse to taking possession of shares in advance of its earnings and ex-dividend date, which are usually nearly concurrent, with earnings scheduled for November 20t, 2014.

Traditional Stocks: EMC, Halliburton

Momentum: Abercrombie and Fitch, Joy Global

Double Dip Dividend: Ford (10/29)

Premiums Enhanced by Earnings: Coach (10/28 AM), Facebook (10/28 PM), Twitter (10/27 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.

Weekend Update – September 21, 2014

Somewhere along the line most of us have tried the proven strategy of hanging out with people who were uglier or stupider than we perceived ourselves to be, in order to make ourselves look better by comparison.

There’s nothing really wrong in admitting that to be the case. It’s really the ultimate in victimless opportunism and can truly be a win-win for everyone involved.

The opportunist hopes to break away from that crowd and the crowd feels elevated by its association, or so goes the opportunist’s rationalization.

Markets are no different and this past week was as good of an example of that tried and tested phenomenon as you might ever find. In this case, the opportunist was the US equity market, but it really can rarely be a win-win situation.

Bonds, currencies and precious metals?

Ugly and stupid.

There were three potentially market rocking stories this week that could have struck fear in stock investors, but neither an upcoming FOMC statement, a pending independence referendum in Scotland, nor history’s largest IPO could do what common sense said should occur, particularly with liquidity being threatened from multiple directions.

You can probably thank the less than attractive alternatives for making stocks look so good to investors.

U.S. equity markets just did what we’ve become so accustomed to, other than for brief moments over the past two years, as the week ended on yet another new record high with the DJIA moving higher each day of the week.

Last week was like a perfect storm, except that the winds blew from all different directions during the latter half of the week.

The week started a bit ominously, but after a while it was clear that selling was narrow in scope and appeared to be limited to profit taking in some of the year’s big gainers, ostensibly to raise cash for any hoped for Alibaba (BABA) allocation, that was unlikely to materialize for most retail investors.

But when the competition is weak, it doesn’t take much to shine and stand out from the crowd. With the week’s first challenge being whether the FOMC was going to accelerate their time table for raising interest rates, all it took was The Wall Street Journal’s Jon Hilsenrath expressing the belief that the phrase “considerable time,” would remain intact to allow stocks to stand out from the crowd.

Never mind that Hilsenrath had yet to demonstrate an inside track to the Yellen Federal Reserve, as he seemed to have had during the Bernanke era. Also forget about the fact that the FOMC has been using that phrase since March 2014 and sooner or later it has to give way to the relization that “considerable time” has already passed. That’s best left to deal with at some other time in the future.

Neither of those were important as all of the other options were looking worse.

With the outcome of the independence referendum being far from certain stocks had been smart enough not to have predicted the eventual outcome and put itself in jeopardy if independence was ratified. Instead the risk was borne by currencies and foreign stock markets.

Precious metals? Who in the world has been putting new money into precious metals of late?

So stocks looked great, but after getting a makeover last week, suddenly the crowd may not look so unappealing. Even precious metals may find some suitors because they just don’t want to chase after stocks and wind up getting disappointed.

Who knew that the high school experience could have taught so much about the behavior of stocks?

The behavior of stocks this week, was also similar to how high school “A-listers” may have acted when pulling in someone from the “losers.” The welcome isn’t always a full and complete embrace and somewhat circumspect or still maintaining an aura of superiority.

^SPX ChartIn this case the “A-list” DJIA greatly outperformed other major indexes this past week as the advance didn’t fully embrace a broader selection of stocks.

Despite last week’s nice gains against the odds, in this perfect storm, everything went right. Yet the embrace was with less conviction than it appeared.

That doesn’t mean that I want to go and join the losers, but I may be circumspect of the superficial appearance of those “A-listers” as next week is about to begin.

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

By comparison, Yahoo (YHOO) looks even less appealing now that it has given up a portion of its stake in Alibaba.

I purchased a small Yahoo position late this past Thursday, when noticing that the in the money option premium was rising even as shares were declining.

The following day I closed those positions shortly after Alibaba started trading as the gain in shares wasn’t matched by a similar gain the premium, resulting in a net credit greater than allowing the position to be assigned.

The funny thing was that the position never would have been assigned as reportedly Yahoo shares were being used a proxy to shorting Alibaba and share price went substantially lower, as a result, even while the value of Yahoo’s remaining stake in Alibaba appreciated by about an additional 37% from the IPO price.

While that kind of short selling strategy may continue, Yahoo is also reportedly becoming the focus of attention from other sources, while it may still stand to benefit from its continuing Alibaba position.

With lots of attention being directed toward its still unproven CEO, Marissa Mayer, as to what she will do with the IPO proceeds, I expect that the Yahoo option premium will remain elevated as so many factors are now coming into play.

While I like those prospects and expect to re-purchase shares, I don’t think that I’ll be allocating too much to this position because of all of the uncertainty involved, but do like the evolving soap opera.

When it comes to comparisons, there’s little that Blackberry (BBRY) can do to make itself look appealing. Where exactly can it hang out to be able to stand out in the crowd and get the attention of those that vote on popularity? Still, under the leadership of John Chen, Blackberry has ended its slide toward oblivion and at least gives appearances of now having a
s
trategy and the ability to execute.

Blackberry reports earnings this coming week and thanks to a lift provided by a Morgan Stanley (MS) analyst out-performed the NASDAQ 100 for the week. 

The option market has assigned an implied move of 9.7% for the coming week and at Friday’s closing price a 1% ROI could be obtained even if shares fell by 13.7%. That kind of comparison makes Blackberry look good to me.

While maybe not looking good in comparison to its chief competitor, CVS Health (CVS) on the basis of its self proclaimed status of the guardians of the nation’s health after belatedly eliminating the sale of cigarettes from its stores, Walgreen looks food to me. That’s especially the case now that it seems to be settling into a trading range after it, too, belatedly, decided against a tax inversion strategy.

Walgreen, as with many other stocks trading in a range, but occasionally punctuated by substantive price moves related to earnings or other events, offers a nice option premium that may exceed the current risk of share ownership.

Until recently the comparison to gold during the summer worked out well for Market Vectors Gold Miners ETF (GDX), having out-performed the SPDR Gold Trust (GLD). More recently, however, the Miners Index has had an abysmal month of September and is approaching a 2 year low. However, its beta is still quite low and shares are now trading below their yearly mid-point range, while offering a premium that may offset what I believe to be limited downside risk.

I don’t look at ETF vehicles very often, but this one may be right in terms of timing and price. The availability of expanded weekly options, strike prices in $0.50 increments and manageable bid-ask spreads makes this potentially a good candidate for serial rollover if it finds some support and begins trading in a range.

Fastenal (FAST) is one of those stocks that may not have much glamour and may not stand out sufficiently to get noticed. To me, though, it is a superstar in the world of covered options as it has traded reliably within a range and consistently returned to the mid-point of that range, where it currently resides.

Having rolled over shares this past Friday after a mid-session drop below the strike, I watched as it recovered enough to close above the strike. Had it been assigned, as originally thought would occur, I knew that at its current price I wanted to re-purchase shares. Instead, now I want to add shares, but being mindful that it will report earnings in just a few weeks.

Despite Alibaba’s successful IPO, it’s still difficult for me to have too much confidence in stocks that have either a heavy reliance on the Chinese economy or are Chinese companies. Fortunately or unfortunately, I do make exceptions for both situations, although far fewer for the latter.

Joy Global (JOY) has extensive interests in China and is very dependent on continued growth of the Chinese economy, which is difficult to measure with reliability. Of course with our own GDP being reported this coming Friday, we know all too well, based on the recent pattern of revisions, that data should always be viewed warily.

With some weakness in this sector, witness the recent drop in Caterpillar (CAT), Joy Global is approaching correction territory over the past month and is beginning to once again look appealing, not having owned shares in nearly a year. These shares can be volatile, but with patience and an inner sense of serenity, the option premiums can atone for moments of anxiety.

Despite still holding a very expensive lot of Coach (COH) shares for far too long, it is still one of my favorite stocks over the longer term time frame, having owned it on 21 occasions over 25 months.

Smarting from the pain of that lot I still hold, it took a while before finding the courage to purchase an additional lot, but that recent lot was assigned this past week and I’m ready to add another in its place, as it seems that Coach has found some support at its current level. In the past Coach has been an excellent covered option trade when it traded in a range. The reason for it offering attractive option premiums was due to its predictably large earnings related moves. However, in the past, it had a wonderful habit of its price reverting to the mean.

If so, I don’t mind executing serial trades, reaping premiums and the occasional premium to help offset the existing paper loss. As the luster from Kors (KORS) seems to be waning there is also less populist battering of Coach, which remains very popular internationally. It’s commitment to maintaining its dividend makes it easy to hold shares while awaiting what I hope is an inevitable, albeit, unusually slow recovery.

Whole Foods (WFM) is another of those companies that I own that is currently well below its purchase price. As with Coach, I eventually found the courage to purchase more shares and have done so 4 times in the past 3 months, as it appears to have also found some price support.

Recently its premiums have become more attractive as the company has become a topic of speculation regarding activist intervention. While I don’t think there’s too much to come of that speculation, I do believe that shares are poised to continue climbing and hopefully in a slow and sustained manner. It goes ex-dividend this week and while not the most generous of dividends it does supplement the potential return offered by also selling call options on shares sufficiently to make it an attractive consideration.

Finally, Oracle (ORCL) is back in the news and in the last couple of years that hasn’t really been a good thing. After a number of disappointing earnings reports over that time, its Chairman and CEO, Larry Ellison, blasted those around him, finding plenty of places to lay blame. His absence from last year’s earnings report and conference in order to attend Oracle Team USA’s effort in the Americas Cup race struck me as inappropriate.

Now the news of Ellison stepping down as CEO, while retaining the Chairmanship, preceded this most recent quarter’s disappointing earnings. It also  was a prelude to the announcement of a power sharing plan with the appointment of co-CEOs, because we all know how much high achievers like to share power and glory.

Yet, with this past Friday’s price decline in Oracle it is again becoming a potentially attractive purchase candidate, particularly with an upcoming, albeit modest dividend coming on October 6, 2014.

That happens to be a Monday, and I wish there were more such Monday opportunities for those stocks that I follow. Those are often the best of the “Double Dip Dividend” selections, as early assignment to capture the dividend must occur on the preceding Friday and typically means receiving an entire week’s option premium, while being able to reinvest the exercise proceeds to generate even more income.

 

Traditional Stocks: Fastenal, Market Vectors Gold Miners ETF, Oracle, Walgreen

Momentum: Coach, Joy Global, Yahoo

Double Dip Dividend: Whole Foods (9/24 $0.12)

Premiums Enhanced by Earnings: Blackberry (9/23 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.

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.

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.

Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that in
itial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 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.

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 onesupermodelto 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 theDogs of the Dow Theorygets so much attention. In a year that so many stocks are higher the comparison to those that have truly underperformed is really heightened.
As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum andPEEcategories 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 noDogs of the Dowcandidates 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 outperformers and underperformers 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 outperform 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 outperformed the S&P 500 by nearly the amount that Barclays underperformed 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 thelosercategory 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 relativedog,” 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 reacquiring 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 TMobile 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 exdividend 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 exdividend 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 spinoff plans for its low growth Red Lobster chain. Shares go exdividend 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 reengineering.
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 outperformed 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 (exdiv 1/8), Darden (exdiv 1/8), Verizon (exdiv 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.

 

Weekend Update – December 15, 2013

People tend to have very strong feelings about entitlements.

Prior to this week there were so many people waiting for the so-called “Santa Claus Rally” that you would have thought that it was considered to be an entitlement.

After the week we’ve just had you can probably add it to the other market axioms that haven’t really worked out this year. If anything, so far it appears that you should have taken your vacation right now along with Santa Claus, who must have not realized that his vacation conflicted with the scheduled rally. You also should probably not taken the wizened advice to vacation months ago when the traditional prevailing attitude implored you to “sell in May and go away.”

The past week saw the S&P 500 drop 1.7% to a closing level not seen in a 22 trading sessions. This week’s drop places us a full 1.8% below the recent record high. Yet, like during a number of other smallish declines in 2013, this one is also being warily eyed as being the precursor to the long overdue, but healthy, 10% decline. We have simply become so accustomed to advances that even what would ordinarily be viewed as downward blips are hard to accept.

For those that have a hard time dealing with conflict, these are not good times, as the Santa Claus Rally is being threatened by the specter of a correction in the waiting. While there’s still time for the traditional rally it’s hard to know whether Santa Claus factored the thought of an outgoing Federal Reserve Chairman presiding over his final FOMC meeting and holding his final press conference.

Oh, and then there’s also the little matter of possibly announcing the beginning of the taper to Quantitative Easing. Just a week earlier the idea that such an announcement would come in December was considered highly unlikely. Now it seems like a real possibility and not the kind that the markets were altogether comfortable with, even as they expressed comfort with the previous week’s Employment Situation Report.

While I admire Ben Bernanke and believe that he helped to rescue the world’s financial markets, it may not be far fetched to cast him as the “Grinch” who stole the Santa Claus Rally if the markets are taken off guard. Personally, I don’t believe that he will make the decision to begin the tapering, in deference to Janet Yellen, his expected successor, privilege to decide on timing, magnitude and speed.

However, I’m not really willing to commit very much to that belief and will likely exercise the same caution as I did last week.

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).

Last week was one of my slowest trading weeks in a long time. Even with cash to spend there never seemed to be a signal that price stability would temper downward risk. Moving forward to this week comes the challenge of trying to distinguish between value and value trap, as many of the stocks that I regularly follow are at more appealing prices but may be at at continued risk.

With lots of positions set to expire this week, the greatest likelihood is that whatever new positions I do establish this week will be with the concomitant use of expanded weekly options or even the January 18, 2014 option, rather than options expiring this coming Friday. The options market is certainly expecting some additional fireworks this coming week as option premiums are generally considerably higher than in recent months.

Microsoft (MSFT) is one of those stocks that has come down in the past week, but like so many still has some downside potential. Of its own weight it can easily go down another 3%, but under the burden of a market in correction its next support level is approximately 8% lower. Since the market’s recent high just a few weeks ago, Microsoft has slightly under-performed the market, but it does trade with a low beta, perhaps offering some relative down side protection. As with many other stocks this week its option premium is far more generous than in the recent past making it perhaps more difficult to resist, but with that reward comes the risk.

There’s probably not much reason or value in re-telling the story of Blackberry (BBRY). Most already have an idea of how the story is going to end, but that doesn’t quiet those who dream of a better future. For some, the future is defined by a weekly option contract and Blackberry reports earnings this week. The options market is implying about a 12% move and for the really adventurous the sale of a put with a strike level almost 17% below Friday’s close could yield a weekly ROI of 1.4%. On a note that shouldn’t be construed as being positive, as the market itself appears a bit more tenuous, Blackberry’s own beta has taken a large drop in the past 3 months. The risk, still remains, however.

Although I discussed the possibility of purchasing shares of Joy Global (JOY) in last week’s article after they reported earnings, I didn’t do so, as it fell hostage to my inactivity even after a relatively large price drop. Despite a recovery from the low point of the week, Joy Global, which has been very much a range bound trading stock of late is still in the range that has worked well for covered call sales. The same is a little less so for Caterpillar (CAT) which is approaching the upper end of its range as it has worked its way toward the $87.50 level. However, with even a mild retreat I would consider once again adding shares buoyed a little bit with the knowledge that shares do also go ex-dividend near the end of the January 2014 option cycle.

Citibank (C) was another that I considered purchasing last week and following a small price drop it continues to have some appeal, also having slightly under-performed the S&P 500 in the past three weeks. However, despite its beta having fallen considerably, it is still potentially a stock that could respond far more so than the overall market. Its option premium for an at the money weekly strike is approximately 18% higher than last week, suggesting that the week may be somewhat more risky than of late.

While my shares of Halliburton (HAL) haven’t fared well in the past week, I am looking at reuniting my “evil troika” by considering purchases of both British Petroleum (BP) and Transocean (RIG), which are now also down from their recent highs. Following in a week in which Anadarko (APC) plunged after a bankruptcy court ruling from a nearly decade old case, the “evil troika” is proof that there is life after litigation and after jury awards, fines and clean up costs. While oil and oil services have been volatile of late, both British Petroleum and Transocean share with Microsoft the fact that they have already under-performed the S&P 500 during this latest downturn but have low betas, hopefully offering some relative downside protection in a faltering market. Perhaps even better is that they are beyond the point of significant downward movement emanating from judicial decisions.

Coach (COH) hasn’t been able to garner much respect lately, although there has been some insider buying when others have been disparaging the company. Meanwhile it has been trading in a fairly well defined range of late. It is a stock that I’ve owned eight times during 2013 and regret not having owned more frequently, particularly since it began offering weekly and then expanded options. Like a number of stocks that I’m considering this week, it too is still closer to the upper end of the range than I would normally initiate new positions and wouldn’t mind seeing a little more weakness.

Seagate Technology (STX) may have a higher beta than is warranted to consider at a time that the market may be labile, however it has recently traded well at the $47.50 level and offers an attractive reward for those willing to accept the frequent movements its shares make, even on an intraday basis. My expectation is that If I do consider a trade it would either be the sale of puts before Wednesday’s big events or otherwise waiting for the aftermath and looking at expanded option dates.

Finally, and yet again, it seems as if it may be time to consider a purchase of eBay (EBAY). While I’ll never really lose count of how many times I own a specific stock, going in and out of positions as they are assigned, eBay is just becoming the perfect example of a stock trading within a range. For anyone selling options on eBay, perhaps the best news was its recent downgrade that chided it for trading in a range and further expecting that it would continue range bound. Although you can’t necessarily trade on the basis of the absolute value of price movements of a stock, the next best way to do so is through buying shares and selling covered calls and then repeating the process as often as possible.

Traditional Stocks: British Petroleum, Caterpillar, eBay, Microsoft, Transocean

Momentum Stocks: Citibank, Coach, Joy Global, Seagate Technology

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackberry (12/20 AM)

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