Posted on

Weekend Update – May 10, 2015

Many years ago people were fascinated by the movie “The Three Faces of Eve.”

It was the story of a woman afflicted with what was known at the time as “Multiple Personality Disorder,” although many incorrectly believed that the story was one characteristic of an individual with schizophrenia.

For her performance of all 3 characters, none of whom was aware of any of the others, Joanne Woodward won an Oscar for “Best Actress.” Yet 30 years later, in a sign of an unjust society, neither Eddie Murphy nor Arsenio Hall received any notice whatsoever from The Academy for each portraying 4 distinct characters.

While there’s still hope that such acting genius may someday be rewarded, there’s very little hope of being able to understand just what face the market will be showing from day to day.

Doug Kass, a well known hedge fund manager is fond of Tweeting that the market has no memory from day to day and that observation, while not seeming to be offering a diagnosis, has it well characterized.

Lack of memory for important information not explained by ordinary forgetfulness is one of the cardinal signs of Dissociative Identity Disorder and this market, however one wishes to characterize it, may have the same affliction as was suffered by Eve. But as long as it keeps reaching new record highs, it too will keep winning awards for its performance.

While some may say that the market is “acting schizophrenic,” they neither know the distinction between that malady and Dissociative Identity Disorder, nor understand the use of adverbs. While volatility may also be a hallmark of the disorder the rapid alternations between market plunges and surges are doing nothing to enhance volatility. In fact, for all of the uncertainty, volatility remains within easy striking distance of its 52 week low and was virtually unchanged last week.

In a week with very little economic news scheduled until this past Friday’s Employment Situation Report and with most key companies having already reported earnings, there was little reason to expect many large moves. However, as has been the case in recent weeks, there hasn’t always been the requirement of an identifiable reason for the market making a large move. What has also been the case is that so often the very next day brought about a reversal of fortune or mis-fortune of the previous day and another subsequent Doug Kass Tweet.

Those Kass market memory Tweets are fairly common and I do believe that he recalls having sent them on many previous occasions. While I offer him no diagnosis based on those Tweets, they do perfectly sum up the market that we’ve come to know.

The problem is that which just don’t know which market will be showing up from day to day and sometimes from hour to hour.

I wonder if Eve had that same problem?

Compounding the inherent uncertainty occurs when an otherwise dependable and reliable source seems to turn on you.

Mid-week we got to see a Janet Yellen face that we had only seen once previously. It was the face that unlike its more commonly visible counter-part, wasn’t the one that sought directly or indirectly to calm and prop up stock markets.

During her tenure, especially during her post-FOMC Statement release press conferences, most of us have come to appreciate the boost of confidence Janet Yellen has supplied markets, as well as having an appreciation for the manner in which she balances pragmatic and social concerns with monetary policy.

But this week instead it was that Yellen character that questions stock market value, almost in the same way as a predecessor pointed a finger at “frothy exuberance.”

While not quite as bad as the racy and wild side of Eve that tried to murder her child, the value questioning side of Janet Yellen sent markets for a tumble. But just as after her 2014 comments about “substantially stretched” valuation metrics in bio-technology companies, the impact may be short lived, as it was this week.

Perhaps some thanks for that should go to the auspiciously timed release of the Employment Situation Report that avoided creating either a “bad news is good news” or “good news is bad news” by delivering numbers that were right in line with expectations.

Of course, when considering how much contra-distinction there has been in recent monthly Employment Situation Reports one might be excused for believing that they too suffer from Dissociative Identity Disorder and it may be injurious to one’s portfolio health to base too many actions on any given month’s data.

This coming week is another very slow one for economic news. While earnings season is now winding down the catalyst or the retardant for the market to get to the next new set of highs may be the slew of national retailers reporting earnings this week.

Some 6 months ago those retailers were among those optimistically talking about how they would benefit from increased consumer spending as a result of lower energy prices.

About that….

Those same retailers may be putting on a different face when reporting this week if those gains haven’t materialized, as there are no indications that the GDP has grown as expected.

To the contrary, actually.

Only one of the major retailers will report before this Wednesday’s Retail Sales Report, but it was the CEO of that company, Terry Lundgren, who was initially among the most optimistic regarding the prospects for Macys (NYSE:M) and who months later made the very astute observation that the energy savings experienced by consumers hadn’t accumulated sufficiently to create the feeling of actually having more discretionary cash to spend.

Sooner or later the projections for significant growth in GDP will have to be written off as just the rants of economists who had surrendered their better judgment to their racy and wild alternate egos and who can’t be blamed for their actions.

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

After the last two weeks, I think, that even after a previous lifetime of toiling away for a paycheck and not really appreciating its significance, I finally understand the meaning of “TGIF.”

The strong recoveries seen in each of the past two Fridays helped to rescue some weeks that were turning out to be fairly dour.

The downside, however, is that when the coming week is about to begin, so many of the stocks that you had been eying for a purchase were up sharply to end the previous week.

There are probably worse problems to have in life, so I won’t dwell too long on that one, but that is where this past Friday’s 267 point gain in the DJIA has us beginning the new week.

Sinclair Broadcasting (NASDAQ:SBGI) has quietly become the largest television station operators in the United States. While seemingly the only topics discussed these days are about streaming signals, satellites and cable there’s still life left in terrestrial television. The family controlled company certainly believes in the future of traditional television broadcasting as over the past several years the company has actively amassed new stations around the country.

Following an initial move higher after it reporting earnings shares gave up some ground and are now about 9% below its recent high from last month, at which time I had my previous shares assigned.

I purchased shares on 5 occasions in 2014 and have been waiting for a chance to do so in 2015. With its recent decline and with this being the final week of a monthly option cycle, I would consider once again adding shares in the hopes of a quick assignment. However, if not assigned, shares are then ex-dividend May 28th and I would consider selling either June or the July 2015 options on those shares.

Mattel (NASDAQ:MAT) has suffered of late.

It literally started 2015 off by being named one of the worst run companies of 2014 on New Years Day. Its shares continued to stumble even after its CEO unexpectedly resigned a few weeks later as the lure of its Barbie was waning in a world of electronic toys more welcomingly embraced by some of its competitors.

More recently some of the negativity that characterized 2015 had abated as the market actually embraced the smaller than expected loss at the most recent earnings report. While some of the gains have been since digested, Mattel may have now seen what the near term bottom looks like.

With earnings now out of the way for a short while and an upcoming ex-dividend date the following week, I am considering adding shares, but bypassing the week remaining on the monthly May 2015 contract and going directly to the June contract and banking on some share gains and not just option premiums and dividends for the effort.

Fastenal (NASDAQ:FAST) is one of those stocks that I always like to own, as it is an assuming kind of company that tends to reflect what is going on in the economy and is relatively immune from currency exchange issues
.

Most recently, after having positively reacted to earnings it failed to climb back toward where it had been at the time of its January earnings report. However, it does appear as if it is building a base to make that assault. As with Sinclair Broadcasting and Mattel, Fastenal only offers monthly options, so any potential purchase this week paired with an option sale could look at the May 15, 2015 contracts, effectively making it a weekly contract, or go directly to the June 2015 expirations, especially if believing that there is some capital appreciation in store for shares.

DuPont (NYSE:DD) and Teva Pharmaceuticals (NYSE:TEVA) have both spent a lot of time in the news lately and both are ex-dividend this week.

DuPont is one stock that came to mind when bemoaning the strong gains seen this past Friday, as it was definitely a beneficiary of broad market strength. It continues to be embroiled in a fight with activists which may have profound ramifications with how investors look at and value a company’s intellectual and research pursuits.

The question of how valuable research activities are to a company if they are part of a separate company is one that pits short term and long term outlooks against one another. Although I tend to trade for the short term, and while I believe that Nelson Peltz is generally a positive influence on the companies in which he has taken a significant financial stake, I disagree with the idea of splitting off assets that are at the core of developing intellectual property.

However, as long as the fighting continues, there is opportunity to see shares climb even higher. It is precisely because of the uncertainty that comes along with the ongoing conflict that DuPont is offering an exceptionally high option premium, particularly in a week that it is ex-dividend.

The world of pharmaceutical companies was once so staid. Every self respecting portfolio was required to own shares in a high dividend paying blue chip pharmaceutical company, many of whom have been swallowed up over the years in the process of creating even larger and less responsive behemoths.

From nothingness, generic drug companies and bio-pharmaceutical companies are becoming their own behemoths and are recently at center stage with seemingly daily merger and acquisition activity.

Teva has joined the crowd seeking to grow through acquisition and may be willing to fight for the opportunity to grow. Of course, its target may have some other ideas, including possibly seeking to purchase Teva itself.

Like DuPont, the uncertainty in the air has it offering a very appealing option premium even in a week that shares are ex-dividend. With shares having recently declined by about 10% in the past month, it’s possible that some of the downside risk that may be associated with a fight or a failed conquest attempt has already been discounted.

Zillow (NASDAQ:Z) reports earnings this week having declined about 25% since its last earnings report. Its CEO, a darling of cable business news blamed the prolonged regulatory process encountered during its proposed purchase of its competitor Trulia, for leaving the company “trending a couple quarters behind where we’d like to be.”

But that comment was from last month, so the expectation would be that the market is prepared for whatever may come their way as earnings are reported this week.

That kind of logic is fine until faced with counter-examples, such as SanDisk (NASDAQ:SNDK) which despite warning upon warning, still managed to surprise everyone. Of course, the same could be said for early 2014 when markets seemed to be surprised by how bad weather impacted earnings after having heard nothing but how weather was effecting sales for months.

In this case the option market is implying an 8.1% move for Zillow after earnings are reported. That’s fairly mild after the past 2 weeks of having seen declines on the order of 25% coming from companies that couldn’t place many excuses for its performance at the feet of currency exchange woes.

Finally, it takes a lot for me to consider a new stock and to think about putting it into portfolio rotation. It’s even more difficult to do that with a company that has less than 6 months of public trading behind it.

I recently found my second ever blog article, one from 8 years ago, which was about peer lending re-posted on an aggregator site. At the time, I looked at peer lending as a potential means of diversifying one’s portfolio, especially with the aim of generating income streams.

While the early leader of the concept is still around, it was LendingClub (NYSE:LC) that finally brought it to the equity markets.

Its earnings last week, despite being slightly better than the consensus, did nothing to stem the downward price spiral since the IPO. The stock’s close tracking of the 10 Year Treasury Note broke down in March, but I believe that with the stock approaching its IPO price that concordance with interest rates will soon be re-established.

If that proves to be the case and there is a suggestion that the bond market may now be on the right path in predicting the inevitable rise in rates, the LendingClub and its shares are likely to prosper.

Like an unusual number of stocks presented this week, LendingClub also offers only monthly options. However, without a dividend to consider, I would look at any potential purchase of shares as a short term trade and would sell the May 2015 options, which are offering a very attractive premium as the possibility of further share price declines are being factored in by the options market.

Traditional Stocks: Fastenal, Mattel, Sinclair Broadcasting

Momentum Stocks: LendingClub

Double Dip Dividend: DuPont (5/13), Teva Pharmaceuticals (5/15)

Premiums Enhanced by Earnings: Zillow (5/12 PM)

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

Posted on

Weekend Update – April 19, 2015

When I was a kid just about the funniest word any of us had ever heard was “fink.” Way back then that was pretty much the way Mad Magazine felt too, as it used that word with great regularity.

I was stunned the very first time I actually met someone whose last name was “Fink,” but that came only after some giggles. I think the only thing funnier was when I met Morris Lipschitz.

Sadly, I thought that was funny even though it was after college, as it reminded me of the prank phone calls we used to make as kids.

I think “fink” has since fallen out of common parlance. Back then hearing the word “Fink” word evoked the same reactions as today’s kids may experience when hearing a sentence such as “but I do do what you tell me to do.”

I don’t think that’s very funny after the first 20 or so times, but I’ve gained a certain level of maturity over the years.

I don’t know very much with any degree of certainty, but I do know that I’m never likely to meet Larry Fink, the CEO and Chairman of BlackRock (NYSE:BLK).

With more than $4 trillion under management people at least give the courtesy of listening when Larry Fink speaks, even if they may not agree with the message or the opinion. The only giggles that he may get are when people may feel the need to laugh when they’re not certain if he’s joking.

This week, he wasn’t joking, although there were certainly some, at whom his message was directed, that won’t take it seriously or to heart.

I never really thought about Larry Fink very much until this week whenhe said something that needed to be said.

While investors seem to love buybacks and dividend hikes Fink politely said that CEOs were being “too nice to shareholders.”

The most conventional interpretation is that buybacks and dividends may be coming at the expense of future growth, research and investment in the business. It also calls into question whether you really need a CEO and a board to do any long range strategic planning if companies are going to become something on the order of a REIT and just return earnings to shareholders in one form or another while effectively mortgaging the future.

Of course, that also calls into question the role
or responsibility of activists, who now take great pains to distinguish themselves from what used to be called corporate raiders back in the days when I thought the very mention of Lipschitz was hilarious.

They may be more genteel in their ways and they may stick around longer, but so do buzzards as long as there’s still something left on the carcass.

What Fink didn’t directly say was that CEOs and their Board of Directors were being far too nice to themselves at the expense of the future health of their company. Their paydays, both direct and indirect, benefit far more from short term strategies than do shareholders, especially those who are truly investors and not traders.

Jack Welch, former Chairman and CEO of General Electric (NYSE:GE) which has certainly been in the news lately for its own buybacks, may, in hindsight begin to seem like an Emperor without much of a wardrobe. The haze from hot air may have obscured the view, but to his never ending credit, Welch has long criticized incompetent board directors and the roles they may play in the diminution of once great American companies.

Sooner or later the cash needed for buybacks is going to start to dry up, especially when the predominant buying of shares may be at price far removed from bargain share prices.

What then?

It’s difficult to argue that fundamentals have been altered through intervention in the form of buybacks, but that fuel may have peaked with the recent General Electric announcement. It’s hard to imagine, but we may soon get to that point that quarter to quarter comparisons will actually have to depend on real earnings and not simply benefiting from having fewer and fewer shares in the float from one quarter to the next.

The prevailing question, at least in my mind, is where will the next real catalyst come from to drive markets higher. As currency exchange issues have been making themselves tangible as earnings are forthcoming, the impact has, thus far been minimal as we’ve been expecting the drag on earnings.

Prior to Friday’s sell off, the limited earnings reports received where currency was a detrimental factor in earnings and forward guidance was greeted positively, as the news wasn’t as bad as expected.

Fortunately, the market reacted to the expected bad news in a more mature manner than I’ve been known to react to names.

But going higher on less disappointing than expected results is not a good strategy to keep banking on. There has to be something more tangible than things not being as bad as we thought, especially as energy prices may be stabilizing and interest rates moving higher.

Larry Fink has the perfect solution, although it’s a little old fashioned.

Invest in yourself.

That’s sound advice for individuals, just as it is for businesses that care about growth and prosperity.

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

American Express (NYSE:AXP) has not had a very good ride since Costco (NASDAQ:COST) announced that it was terminating its co-branding agreement with them, that allowed it to be the exclusive card accepted at its shopping warehouses. While that may not have been a huge surprise, what was a surprise was just how important of a player Costco may have been in American Express revenues. As a result, those shares have fallen more than 10% in the 2 months since the announcement of the split, which will occur in the first quarter of 2016.

American Express reported earnings this past week and dropped heavily on Friday, having done so before the overall market turned very sour. But buried in the bad news of decreased revenue, that supposedly stemmed from decreased gas sales, was the fact that they don’t anticipate further revenue declines this year.

Based on my perception of recent degradation in customer service, I think that they may have already become cost cutting through workforce reductions prior to the end of their agreement with Costco. SO while revenue may not be growing any time in 2015, the bottom line may end up better than expected.

While there may not be much in the way of growth prospects this year a rising interest rate environment will still help American Express and it is now offering a better option premium than it has in quite some time as uncertainty has taken hold.

Microsoft (NASDAQ:MSFT) and eBay (NASDAQ:EBAY) both report earnings this week and both will likely report the adverse impact of a stronger US dollar and provide guarded guidance, but if the past week is any guide the market will be understanding.

Despite the bump received from their new CEO and the bump received from having an activist pushing eBay’s Board’s buttons, Microsoft and eBay respectively have trailed the S&P 500 over the past year.

Microsoft still hasn’t recovered from its last earnings decline, although eBay has, but in the past month has been making its way back toward those near term lows as it may be getting closer to spinning off its profitable PayPal unit having just completed a 5 year non-compete contract with PayPal.

As eBay approaches that lower price level it has returned within the range that I’m comfortable buying shares. While I u
sually consider the sale of puts as the primary way to engage with a stock getting ready to report earnings, I wouldn’t mind owning shares and the enhanced premium offsets some of the added risk of entering a position at this point.

As with eBay, I prefer considering an earnings related trade when shares have already had some downside pressure on shares. While eBay is a better candidate in that regard, Microsoft also has a premium that will also offset some of the earnings related risk. Like eBay, the options market is anticipating a relatively sedate price move, that if correct in magnitude, even if an adverse direction, could be relatively easily managed while awaiting some recovery.

Colgate (NYSE:CL) goes ex-dividend this week and I continually tell myself that I will be someday be buying shares. As a one time Pediatric Dentist it’s probably the least I could do after a lifetime of being the fifth out of those 5 dentists on the panel. But somehow that’s never happened, to the best of my recollection.

While it does have a low beta and isn’t necessarily shares that you buy in anticipation of excitement, if those shares are not assigned during the upcoming week, there is a need to be prepared for earnings the following week and potentially the need for a longer term commitment if earnings disappoint.

I like considering Best Buy (NYSE:BBY) whenever its shares have gotten to the point of having declined 10%. It has done just that and a little bit more in the past month and does it on a fairly regular basis. But in doing so over the past 14 months the lows have been higher as have the highs along the way.

That has been a good formula for considering either adding shares and selling calls or selling puts. In either case the premium has long reflected the risk, but the risk appears to be definable and at lest there aren’t too many currency exchange concerns to cloud whatever issues Best Buy faces as it is currently once again relevant.

Bed Bath and Beyond (NASDAQ:BBBY) was on my list last week as a potential candidate to join the portfolio. However, with cash reserves low, it wasn’t a very active week, with only a single new position opened.

This week, despite the sell-off on Friday, I had the good fortune of still being able to see a number of positions get assigned and was able to replenish cash reserves. With a 2.5% decline last week, considerably worse than the S&P 500, Bed Bath and Beyond added to its post-earnings losses from the previous week, as it often does after previous earnings declines. But what it also has done after those declines is to relatively quickly recover.

I think the weakness this week brings us simply one week closer to recovery and while waiting for that recovery the shares do allow you to generate a competitive return for option sales. Because of that anticipated recovery, I might consider using an out of the money option and a time frame longer than a single week, however, particularly as Friday’s market weakness may need its own time for recovery.

Finally, SanDisk (NASDAQ:SNDK) didn’t disappoint when it announced its earnings this past week. It was certainly in line with all of the warnings that it had given over the past month and may make many wonder whether or not they may be Jack Welch’s new poster child for dysfunction at the C-suite and board levels.

With everyone seeming to pile on in their criticism of the company and calling for even more downward price pressure, I’m reminded that SanDisk has been down this path before and arose for the ashes that others had defined for it.

The year to date descent in share price has been impressive and it is only a matter of great luck that I had shares assigned right before another one of its precipitous plunges.

This one is definitely not one for the faint of heart, but I would consider entering a position through the sale of puts, rolling them over, if faced with assignment. However, with an upcoming ex-dividend date the following week, I’d be more inclined to take assignment if faced with it, collect the dividend and work the call sale side of share ownership.

 

Traditional Stocks: American Express, Bed Bath and Beyond

Momentum Stocks: Best Buy, SanDisk

Double Dip Dividend: Colgate (4/21)

Premiums Enhanced by Earnings: eBay (4/22 PM), Microsoft (4/23 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.

Posted on

Weekend Update – April 12, 2015

This was one of those rare weeks where there wasn’t really any kind of theme to guide or move markets.

The week started with some nervousness about where the opening would take us after the previous Friday’s very disappointing Employment Situation Report statistics. On that day some were obliged to even suggest that it was a conspiracy that the report was released on Good Friday, as the markets were conveniently closed for what was supposedly known in advance to be a report that would have otherwise sent markets tumbling.

How convenient. Talk about a fairy tale.

That was as rational an outlook as was the response of the futures and bond markets trading, as they remained opened for holiday abbreviated sessions. Futures did go tumbling and interest rates plunged, leaving a gap for markets to deal with 3 days later.

But by then, after the mandatory initial response to those S&P 500 levels as the market opened, rational thought returned and the market had a very impressive turnaround beginning within minutes of the open.

Some brave souls may have remembered the market’s out-sized response to the previous month’s extraordinarily strong Employment Situation Report data that took the market down for the month to follow, only to see revisions to the data a month later. The 3 days off may have given them enough presence of mind to wonder whether the same outlandish response was really justified again.

One thing that the initial futures response did show us is that the market may be poised to be at risk regardless of what news is coming our way. One month the market views too many jobs as being extremely negative and the next month it views too few jobs as being just as negative.

Somewhere right in the middle may be the real sweet spot that represents the “No News is Good News” sentiment that may be the only safe place to be.

That is the true essence of a Goldilocks stock market, no matter what the accepted definition may be. It is a market where only the mediocre may be without risk. However, the question of whether mediocrity will be enough to continue to propel markets to new heights is usually easily answered.

It isn’t.

After a while warm porridge loses its appeal and something is needed to spice things up to keep Goldilocks returning. U.S. traded stocks have plenty of asset class competition in the event that they become mediocre or unpredictable.

The coming week may be just the thing to make or break the current malaise, that despite having the S&P 500 within about 0.7% of its all time high from just a month ago, is only 2.1% higher for 2015.

Granted that on an annualized basis that would bill respectable, but if the 2015 pattern of alternating monthly advances and declines continues we would end the year far from that annualized rate.

The catalyst could be this new earnings season which begins in earnest next week as the big banks report and then in the weeks to follow. Where the catalyst may arise is from our lowered expectations encountering a better reality than anticipated, as we’ve come to be prepared for some degree of lowered earnings due to currency considerations.

The real wild card will be the balance between currency losses and lower input costs from declining energy prices, as well as the impact, if any from currency hedges that may have been created. Much like the hedging of oil that some airlines were able to successfully implement before it became apparent how prescient that strategy would be, there may be some real currency winners, at least in relative terms.

I actually don’t really remember how the story of Goldilocks ended, but I think there were lots of variations to the story,depending on whether parents wanted to soothe or scare.

The real lesson is that you have to be prepared for either possibility.

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

WIth General Electric (NYSE:GE) getting most everyone’s attention this past Friday morning with plans to divest itself of most of its non-industrial assets, that may leave us with one fewer “systemically important” financial institution.

Too bad, for MetLife (NYSE:MET), which might find it would be less miserable with that proposed assignment if it had more company. It’s easy to understand why financial institutions would want to rid themselves of the yoke they perceive, however, it may be difficult to imagine how MetLife’s desire to avoid that designation can become reality. That is unless the battle goes a very long distance, which in turn could jeopardize a good deal of whatever confidence exists over the restraints that are intended to prevent another financial meltdown.

I believe that the eventuality of those restraints and capital requirements impacting MetLife’s assets is already factored into its share price. If so, MetLife is simply just a proxy for the direction of interest rates, which continue to be volatile as there is still uncertainty over when the eventual interest rate increases will be coming from the FOMC.

While waiting for that to happen MetLife has been trading in a fairly tight range and offering an attractive option premium and dividend. I’ve already owned shares on 3 occasions in 2015 and look forward to more opportunities while waiting to figure out if the economy is too hot or not hot enough or just right.

With the coming week being dominated by bank earnings, one that isn’t reporting until the following week is Morgan Stanley (NYSE:MS). Thus far 2015 hasn’t been especially kind to the money center banks, but it has held Morgan Stanley in particular low regard.

With its well respected CFO heading to warmer pastures it still has a fairly young CEO and lots of depth, with key people continually being exposed to different parts of the company, thereby lessening dependence on any one individual.

With earnings from other banks coming this week the option premiums on Morgan Stanley are a little higher than usual. However, since they report their own earnings before the market opens on Monday of the following week, it would be a good idea to attempt to rollover weekly contracts if not likely to be assigned or to simply sell extended weekly contracts to encompass the additionally enhanced premiums for both this week and the next

Bed Bath and Beyond (NASDAQ:BBBY) is no stranger to significant earnings related price drops. It did so again last week and the options market correctly created the price range in which the stock price varied.

While Bed Bath and Beyond is no stranger to those kind of drops, it does tend to have another common characteristic in that it frequently recovers from those price drops fairly quickly. That’s one reason that when suggesting that consideration be given to selling puts on it last week prior to earnings, I suggested that if threatened with assignment I would rather accept that than to try and rollover the put contracts.

Now that the damage has been done I think it’s safe to come back and consider another look at its shares. If recent history holds true then a purchase could be considered with the idea of seeking some capital gains from shares in addition to the option premiums received for the call sales.

SanDisk (NASDAQ:SNDK) reports earnings this week and has been on quite a wild ride of late. It has the rare distinction of scaring off investors on two occasions in advance of this week’s upcoming earnings. Despite an 11% price climb over the past week, it is still down nearly 20% in the past 2 weeks.

The option market is implying a relatively small 6.8% move in the coming week which is on the low side, perhaps in the belief that there can’t possibly be another shoe to be dropped.

Normally, when considering the sale of puts in advance of earnings I like to look for a strike price that’s outside of the range defined by the options market that will return at least a 1% ROI for the week. However, that strike level is only 7.1% lower, which doesn’t provide too much of a safety cushion.

However, I would be very interested in the possibility of selling puts on SanDisk shares after earnings in the event of a sharp drop or prior to earnings in the event of significant price erosion before the event.

Fastenal (NASDAQ:FAST) also reports earnings this coming week and didn’t change its guidance or offer earnings warnings as it occasionally does in the weeks in advance of the release.

It actually had a nice report last quarter and initially went higher, although a few weeks later, without any tangible news, it nose-dived, along with some of its competitors.

What makes Fastenal interesting is that it is almost entirely US based and so will have very little currency risk. The risk, however, is that it is currently trading near its 2 year lows, so if considering an earnings related trade, I’m thinking of a buy/write and using a May 2015 expiration, to both provide some time to recover from any further decline and to also have a chance at collecting the dividend at the end of April.

With a much more expensive lot of shares of Abercrombie and Fitch (NYSE:ANF) long awaiting an opportunity to sell some calls upon, I’m finally ready to consider adding more shares. The primary goal is to start whittling down some of the losses on those shares and Abercrombie is finally showing some signs of making a floor, at least until the next earnings report at the end of May.

With its dysfunction hopefully all behind it now with the departure of its past CEO it still has a long way to go to reclaim lost ground ceded to others in the fickle adolescent retail market. The reasonable price stability of the past month offers some reason to believe that the time to add shares or open a new position may have finally arrived. Alternatively, however, put sales may be considered, especially if shares open on a lower note to begin the week.

Finally, I don’t know why I keep buying The Gap (NYSE:GPS), except that it never really seems to go anywhere. It does have a decent dividend, but it’s premiums are nothing really spectacular.

What appeals to me about The Gap, however, is that it’s one of those few stocks that is continually under the microscope as it reports monthly sales statistics and as a result it regularly has some enhanced premiums and it tends to alternate rapidly between disappointing and upbeat same store sales.

All in all, that makes it a really good stock to consider for a covered option strategy. It’s especially nice to see a stock that does trade in a fairly tight range, even while it may have occasional hiccoughs that are fairly predictable as to when they will occur, just as their direction isn’t at all predictable.

The Gap reported those same store sales last week and this time they disappointed. That actually marked the second consecutive month of disappointment, which is somewhat unusual, but in having done so, it still hasn’t violated that comfortable range.

I already own some shares and in expectation of a better than expected report for the following month, my inclination is to add shares, but rather than write contracts expiring this week will look at those expiring on either May 8 or May 15, 2015, taking advantage of the added uncertainty coming along with the next scheduled same store sales report. In doing so I would likely think about using an out of the money strike, rather than a near the money strike in anticipation of finally getting some good news and getting back on track at The Gap.

Traditional Stocks: Bed Bath and Beyond, MetLife, Morgan Stanley, The Gap

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: none

Premiums Enhanced by Earnings: Fastenal (4/14 AM), SanDisk (4/15 PM)

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

Posted on

Weekend Update – March 29, 2015

Fresh off of his estate’s victory in a copyright infringement suit, Marvin Gaye comes to my mind this week as I can’t help but wonder what’s going on.

With the Passover holiday approaching this week, I’m also reminded that much of the basis of re-telling the story of the exodus from Egypt is in response to the questions asked by children.

Among the classes of children traditionally described are the wise child, the evil child, the simple one and the one who doesn’t even know how to ask a question.

When it comes to trying to understand the past week I’m feeling a bit more like one of the latter two of those categories, although I still retain the option of holding onto my evil persona.

The week started with the Vice-Chair of the Federal Reserve, who coincidentally had been the Governor of the Bank of Israel many years after the exodus, getting some laughs with jokes that maybe only economists would appreciate. However, to his credit he was able to tone down his hawkish sentiments while still staying true to his tenets, but without frightening markets. That was nice to see, as it was his comments just 2 days after Janet Yellen’s congressional testimony that brought an end to the February rally and, perhaps coincidentally, set us on the path for March.

That hasn’t been a very good path for most investors and with only 2 days of trading remaining in the quarter has it threatening to be the first losing quarter in quite a while as we learned that the most recent quarterly corporate profits over the same time period fell for the first time since 2008.

Yet that news didn’t seem to bother markets this morning as they had a rare session ending with a higher close.

With Stanley Fischer putting everyone into a good mood from a dose of Federal Reserve humor all went pretty well to start the week, with Monday looking like it would mark the first time of having two consecutive days higher in over a month. That was the case until the final 15 minutes of trading and then the market just continued in that downward path throughout most of the rest of the week.

But why? Someone, somewhere had to be asking the obvious question that 3 out of 4 categories of children are capable of asking.

What’s going on?

Friday’s GDP data for the 4th Quarter of 2014 showed no change with the economy growing at an annual 2.2% rate. That’s considerably less than projections based upon lower energy prices fueling a resurgence of consumer activity in the coming year, even recognizing that those perceived benefits were theoretically in only their very nascent stages in late 2014.

While the GDP data is certainly backward looking there’s been nothing happening to support that consumer led growth that we’ve all believed was coming.

Corporate profits are falling, retail sales are flat and home sales aren’t exactly setting the economy on fire, all as energy prices are well off their earlier eye popping lows.

So you might think that would all add an arrow to the quiver of interest rate doves, but the market hasn’t been embracing the idea of continuing low interest rates as much as it’s been fearing the prospects of increasing interest rates.

But this week had nothing to fear. Even the most influential of the hawks seemed and sounded accommodating, but the market wasn’t buying it.

This past week, like recent weeks, has made little sense no matter how much you try to explain it. Just like it’s hard to explain how the defendant’s weren’t aware of the existence of Marvin Gaye’s “Got to Give It Up” or that somehow pestilence, boils and locusts rained down upon the Pharoahs.

No matter how you look at it reason is not reigning.

Even a child who doesn’t know how to ask knows when something is going on.

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

I purchased some American Express (NYSE:AXP) shares a few weeks ago shortly after the news of their loss of Costco (NASDAQ:COST) as a co-branding partner. Coincidentally that decision came at the same time as both my wife and I had individual issues with American Express customer service.

With a combined history of more than 65 years of using American Express as our primary personal and business cards, we’ve done so largely for their customer service. My wife, after speaking to almost 15 representatives is ready to give her card the boot and she reminded me that she’s had that card longer than she’s had me, so I should be on notice.

Coming as no surprise, American Express just announced workforce cutbacks that will only serve to weaken what really distinguished them from the rest, but that may be what it takes to start making shares look attractive again as the company substitutes cost savings for revenues.

Fortunately, my shares from a few weeks ago were quickly assigned and now it looks as if another opportunity may be at hand as it has re-traced its bounce from the sizable drop it took when the Costco news was made known. It’s upcoming ex-dividend date this week adds to the attraction as the company is wasting no time in taking steps to offset what are now expected to be significant revenue losses beginning in 2016.

Who knew to ever ask just how important Costco was to American Express?

I purchased shares of Dow Chemical last week in order to capture the dividend. What I wasn’t expecting was the announcement coming Friday morning of their plans to merge a portion of the company with Olin Corporation (NYSE:OLN) while becoming a majority owner of Olin.

Fortunately that announcement waited until Friday morning so that I was able to retain the dividend. Had it come after Thursday’s close and based on the initial price reaction, those shares would have been assigned early.

While Dow Chemical has been somewhat phlegmatic lately as it tracks energy prices, the sale to Olin appears to be responsive to activist Dan Loeb’s desire to shed low margin businesses. This deal looks to be a great one for Dow Chemical and may also demonstrate that it is serious about improving margins.

GameStop (NYSE:GME) reported earnings this past Friday and recovered significantly from its preliminary decline. I was amazed that it did so after watching what appeared to be a very wooden and canned performance by its CFO during an interview before trading began that didn’t seem very convincing. However, shortly after trading did begin shares climbed significantly.

I like considering adding shares of GameStop after a decline, as there is a long history of people predicting its coming demise and offering very rational and compelling reasons of why they are correct, only to see shares have a mind of their own.

I had shares assigned just a week earlier and was happy to see that assignment come right after its ex-dividend date but before earnings. Now at a lower price it looks tempting again, although I would probably hold out for a little bit more of a decline, perhaps approaching Friday morning’s opening lows.

While GameStop has a reasonably low beta you wouldn’t know it if you owned shares, but fortunately the options market knows it and typically offers premiums that reflect the sudden moves shares are very capable of taking.

Up until about 30 minutes before Friday’s close it hadn’t been a very good week to be in the semiconductor business. That may have changed, at least for a moment or two, as it was announced that Intel (NASDAQ:INTC) was in talks to purchase Altera (NASDAQ:ALTR).

Among those stocks benefiting from that late news was Micron Technology (NASDAQ:MU), which has fallen even more than Intel in 2015.

Micron Technology reports earnings this week and is no stranger to large earnings related moves. The options market, however is implying only a 5.5% price move next week. While I normally look for a strike level that’s outside of the range defined by the implied move that offers at least a 1% ROI for the week, this coming week is a bit odd.

That’s because Micron Technology reports earnings after the market’s close on Thursday, yet the market will be closed for trading on Good Friday.

For that reason I would consider looking at the possibility of selling puts for the following week, but would like to see shares give up some of the gains made in response to the Intel news.

While Intel’s late news helped to rescue it from having sunk below $30 for the first time in 9 months, it did nothing for Oracle (NYSE:ORCL) nor Cisco (NASDAQ:CSCO). They, along with Intel had been significantly under-performing the S&P 500 this week and for the year to date.

Both Cisco and Oracle are ex-dividend this week and following their drops this past week both are beginning to have appeal once again.

With a holiday shortened week and also going ex-dividend the expectation is that option premiums would be noticeably lower, However, both Cisco and Oracle are offering a compelling combination of option premiums and dividends along with some chance of recovering some of their recent losses.

The real challenge for each may be related to currency exchange and how it will impact earnings. However, barring early earnings warnings, Cisco won’t report earnings for another 7 weeks and Oracle not for another 12 weeks, so hopefully that would allow plenty of time to extricate from a position before the added risk of earnings comes into play.

Finally, I came close to buying shares of SanDisk (NASDAQ:SNDK) just a couple of days ago, looking to replace shares that were assigned just 2 weeks earlier.

It’s not often that you see a company give earnings warnings twice within the space of about 2 months, but SanDisk now has that distinction and has plunged on both of those occasions.

What SanDisk may have discovered is what so many others have, in that being an Apple (NASDAQ:AAPL) supplier may be very much a mixed blessing or curse, depending on your perspective at the moment.

While its revenues are certainly being squeezed I’m reminded of a period about 10 years ago when SanDisk was essentially written off by just about everyone as flash memory was becoming to be considered as nothing more than a commodity.

In that time anyone with a little daring would have done very well in that time period with shares nearly doubling the S&P 500 performance.

With a nearly 25% drop over the past few days, even as a commodity or a revenue stressed company, SanDisk may have some opportunity as it approaches its 18 month lows.

As with many other stocks that have taken large falls, I would consider entering a new position through the sale of put options and if faced with the possibility of assignment would try to roll the position over to a forward week in an attempt to delay or preclude assignment while still collecting a premium.

Traditional Stocks: Dow Chemical

Momentum Stocks: GameStop, SanDisk

Double Dip Dividend: American Express (3/31), Cisco (3/31), Oracle (4/2)

Premiums Enhanced by Earnings: Micron Technology (4/2 PM)

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

Posted on

Weekend Update – February 22, 2015


After setting a new high on the S&P 500 last week, the bull was asleep this holiday shortened trading week, having been virtually flat for the first 3 days of trading and having been devoid of the kind of intra-day volatility that has marked most of 2015.

That’s of course only if you ignore how the week ended, as this time the S&P 500 wasn’t partying alone, as the DJIA and other indexes joined in recording new record highs.

For the briefest of moments as the market opened for trading on Friday morning it looked as if that gently sleeping bull was going to slip into some kind of an unwarranted coma and slip away, as the DJIA dropped 100 points with no consequential news to blame.

However, as has been the case for much of 2015 a reversal wiped out that move and returned the market to that gentle sleep that saw a somnolent market add a less than impressive 0.1% to its record close from the previous week.

In a perfect example of why you should give up trying to apply rational thought processes to an irrational situation, the market then later awoke from that gentle sleep in a paroxysm of buying activity, as an issue that we didn’t seem to care about before today, took hold, thereby demonstrating the corollary to “It is what it is” by showing that it only matters when it matters.

That issue revolved around Greece and the European Union. The relationship of Greece and the EU seemed to be heading toward a potential dissolution as a new Greek government was employing its finest bluster, but without much base to its bravado. As it was all unfolding, this time around, as compared to the last such crisis a few years ago, we seemed content to ignore the potential consequences to the EU and their banking system.

While that situation was being played out in the news most analysts agreed it was impressive that US markets were ignoring the drama inherent in the EU dysfunction. The threat of contagion to other “weak sister”nations in the event of a member nation’s exit and the very real question of the continuing integrity of that union seemed to be an irrelevancy to our own markets.

Yet for some reason, while we didn’t care about the potential bad news, the market seemed to really care when the bluster gave way to capitulation, even though the result was reminiscent of the very finest in “kicking the can down the road” as practiced by our own elected officials over the past few governmental stalemates.

From that moment on, as the rumors of some sort of accord were being made known the calm of the week gave way to some irrational buying.

Of course, when that can was on our own shores, the result in our stock market was exactly the same when it was kicked, so the lesson has to be pretty clear about ever wanting to do anything decisive.

Next week, however, may bring a rational reason to do something to either spur that bull to new heights or to send it into retreat.

Forget about the impending congressiona
l testimony that Janet Yellen will be providing for 2 days next week as the impetus for the market to move. Why look for external stimulants in the form of economist-speak when you already have all of the ingredients that you need in the form of fundamentals, a language that you understand?

While “Fashion Week” was last week and exciting for some, the real excitement comes this week with the slew of earnings from major national retailers trying to sell all of those fashions. While their backward looking reports may not reflect the impact of decreased energy prices among their customers, their forward looking comments may finally bring some light to what is really going on in the economy.

With “Retail Sales” reports of the past two months, which also include gasoline purchases, having left a bad taste with investors, a better taste of things to come has already been telegraphed by some retailers in their rosy comments in advance of their earnings release.

This coming week could offer lots of rational reasons to move the market next week. Unfortunately, that could be in either direction.

With earnings reports back on center stage after a relatively quiet earnings week, stocks were mostly asleep, but, that was definitely not the case in other markets. If looking for a source of contagion there are lots of potential culprits.

Bond markets, precious metals and oil all continued their volatility. The 10 Year Treasury Bond, for example saw abrupt and large changes in direction this week and has seen rates head about 30% higher over the past couple of weeks after the FOMC sowed some doubt into their intentions and timing.

^TNX Chart

^TNX data by YCharts

While Janet Yellen may shed some light on FOMC next steps and their time frame, she is, to some degree held hostage by some of those markets, as traders move interest rates and energy prices around without regard to policy or to what they position they held deeply the day before.

For my part, I don’t mind the marked indecision in other markets as long as this current market in equities can keep moving forward a small step at a time in its sleep.

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

Yahoo (NASDAQ:YHOO) after all of the
se years is sadly in the position of having to establish an identity for itself, although with a market capitalization of $42 billion lots of that sadness can be assuaged.

It’s difficult to think of another situation in which a CEO has seen shares rise nearly 180% during their tenure, in this case about 30 months, yet remain so highly criticized. However, after a storied history it is a little embarrassing to be best known as the company that once owned Alibaba (NYSE:BABA), although the billions received and the billions more to come help to ease some of that awkwardness.

With Alibaba’s next lock-up expiration coming on March 18, 2015, there’s potentially some downward pressure on Yahoo which still has a sizeable stake in Alibaba, However, as has been seen over the last few years the flooding of the market with new shares doesn’t necessarily result in the logical outcome.

In the meantime, while there is some concern over the impact of that event on Yahoo shares and as Alibaba has its own uncertainties beyond the lock-up expiration, option premiums in Yahoo have gotten a little richer as shares have already come down 11% since earnings were reported. After that decline either a covered call or put sale, as an intended very short term trade may be appropriate as waiting for Yahoo to find itself before you grow too old.

For as long as Jamie Dimon remains as its CEO and Chairman, JP Morgan Chase (NYSE:JPM) isn’t likely to have any identity problems. Despite not having anywhere near the returns of Yahoo during the period of his tenure and having paid out much more in regulatory fines than Yahoo received for its Alibaba shares, the criticism is scant other than by those who battle over the idea of “too big too faii” and the actual fine-worthy actions.

However, just as the CEO of Yahoo was able to benefit from an event outside of her control, which was the purchase of Alibaba by her predecessor years earlier, Dimon stands to benefit from what will eventually be a rising interest rate rate environment. Amid some confusion over the FOMC’s comments regarding the adverse impact of low rates, but also the adverse impact of raising them too quickly, rates resumed their climb after a quick 4% decline. While the financial sector wasn’t the weakest last weak, energy had that honor, there isn’t too much reason to suspect that interest rates will return to their recent low levels.

BGC Partners (NASDAQ:BGCP) is another company that has no such identity problems as much of its identity is wrapped up in its Chairman and CEO, who has just come to agreement with the board of GFI Group (NYSE:GFIG) in his takeover bid.

For the past 10 years BGC Partners has closely tracked the interest rate on the 10 Year Treasury Note, although notably during much of 2014 it did not. Recently, however, it appears that relationship is back on track. If so, and you believe that rates will be heading higher, the opportunity for share appreciation exists. In addition to that, however, is also a very attractive dividend and shares do go ex-dividend this week. With only a monthly option contract available and large gaps between strike levels, this is a position that may warrant a longer term time frame commitment.

Also going ex-dividend this week are McDonalds (NYSE:MCD) and SanDisk (NASDAQ:SNDK).

I often think about buying shares of McDonalds, but rarely do so. Most of the time that turned out to have been a bad decision if looking at it from a covered option perspective. From a buy and hold perspective, however, it has been more than 2 years since there have been any decent entry points and returns.

With a myriad of problems facing it and a new CEO to tackle them my expectation is that more bad news is unlikely other than at the next earnings release when it wouldn’t be too surprising to see the traditional use of charges against earnings to make the new CEO’s future performance look so much better by comparison. Between now and that date in 2 months, I think there will be lots of opportunity to reap option premiums from shares, as I anticipate it trading in a narrow range or higher. Getting started with a nice dividend this week makes the process more palatable than many have been finding the menu.

SanDisk is a company that was written off years ago as being nothing more than a company that offered a one time leading product that had devolved into a commodity. You don’t, however, see too many analysts re-visiting that opinion as they frequently offer buy recommendations on shares.

SanDisk is also a company that I’ve very infrequently owned, but almost always consider adding shares when I have cash reserves and need some more technology positions in my portfolio. After a week of lots of assignments both are now the case and while its dividend isn’t as generous as that of McDonalds, it serves as a good time for entry and offers a very attractive option premium even during a week that it goes ex-dividend.

Despite a 10% share price increase since earnings, it is still about 15% below its price when it warned on earnings just a week prior to the event and received a belated downgrade from “buy to hold.” WIth continuing upside potential, this is a position that I would consider either leaving some shares uncovered or using more than one strike level for call sales

Most often when considering a trade involving a company about to report earnings and selling put options, my preference is to avoid taking ownership of shares. Generally, put sales shouldn’t be undertaken unless willing to accept the potential liability of ownership, but sometimes you would prefer to only take the reward and not the risk, if you can get away with doing so.

Additionally, I generally look for opportunities where I can receive a 1% ROI for the sale of a weekly put contract that is a strike level below the lower range of the implied move determined by the option market.

However, in the cases of Hewlett Packard (NYSE:HPQ) and The Gap (NYSE:GPS) that 1% ROI is right at the lower boundary, but I would still consider the prospect of put sales because I wouldn’t shy away from share ownership in the event of an adverse price move.

The Gap, which makes sharp moves on a regular basis as it still reports monthly sales, did so just a week earlier. It seems to also regularly find itself alternating in the eyes of investors who send shares higher or lower as if each month brings deep systemic change to the company. However, taking a longer term view or simply looking at its chart, it’s clear that shares have a way of just returning to a fleece-lik
e comfortable level in the $39-$41 range.

In the event of an adverse price movement and facing assignment, puts can be rolled over targeting the next same store sales week as an expiration date or simply taking ownership of shares and then using that same date as a time frame for call sales. If rolling over puts I would be mindful of an April ex-dividend date and would consider taking ownership of shares prior to that time if put contracts aren’t likely to expire.

Since I have room for more than a single new technology position this week, Hewlett Packard warrants a look, as what was once derisively referred to as “old tech” is once again respectable. While I would consider starting the exposure through the sale of puts, with an ex-dividend date coming up in just a few weeks, I’d be more inclined to take assignment in the event of an adverse price move after earnings.

Finally, there’s still reason to believe that energy prices are going to continue to confound most everyone. The coupling and de-coupling of oil to and from the stock market, respectively has become too unpredictable to try to harness. However, given the back and forth seen in prices over the past month as a floor may have been put in oil prices, there may be some opportunity in considering a pairs trade, such as Marathon Oil (NYSE:MRO) and United Continental (NYSE:UAL).

United Continental and other airlines have essentially been mirror images to the moves in oil, although not always for clearly understandable reasons, as the relative role of hedging can vary among airlines, although United has reportedly closed out its hedged positions and may be a more pure trading candidate on the basis of fuel prices..

While it’s not too likely that either of these stocks will move in the same direction concurrently, the short term volatility in their prices and the extremely appealing premiums may allow the chance to prosper in one while awaiting the other’s turn to do the same.

The idea is to purchase shares and sell calls of both as a coupled trade with the expectation that they would be decoupled as oil rises or falls and one position or another is either rolled over or assigned, as a result. The remaining position is then managed on its own merits or possibly even re-coupled.

As with earnings related trades that I make that are usually agnostic to the relative merits of the company, focusing only on the risk – reward proposition, this trade is not one that cares too much about the merits of either company. Rather, it cares about their responses to the unpredictable movements in oil price that have been occurring on daily and even on an intra-day basis of late.

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

Double Dip Dividend: BGC Partners (2/26), McDonalds (2/26), SanDisk (2/26)

Premiums Enhanced by Earnings: Hewlett Packard (2/24 PM), The Gap (2/26 PM)

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

Posted on

Weekend Update – January 18, 2015

This was really a wild week and somehow, with all of the negative movement, and despite futures that were again down triple digits in the previous evening’s futures trading, the stock market somehow managed to move to higher ground to bring a tumultuous week to its end.

Actually, the reason it did so is probably no mystery as the market seems to have re-coupled with oil prices, for good or for bad.

Still it was a week when stocks, interest rates, precious and non-precious metals, oil and currencies were all bouncing around wildly, as thus far, is befitting for 2015.

The tonic, one would have thought could have come from the initiation of another earnings season, traditionally led by the major banks. However “the big boys” suffered on top and bottom lines, citing disappointing results in fixed income and currency trading, as well as simply being held hostage by a low interest rate environment for their more mundane activities, like pumping money into the economy through loans.

Even worse, the unofficial spokesperson for the interest of those “too big to fail,” Jamie Dimon, seemed passively resigned to the reality that the Federal government was in charge and could do with systemically important institutions whatever it deemed appropriate, such as breaking them up.

The first sign of troubles came weeks ago as trader bonus cuts were announced. While declines in trader revenue were expected, the bonus cuts suggested that the declines were steeper than expected, particularly when the bonus cuts were greater than had only recently been announced.

Of course, that leads to the question: “If a banker can’t make money, then who can?”

That’s a reasonable question and has some basis in earnings seasons past and may provide some insight into the future.

For those who follow such things, the past few years have seen a large number of such earnings seasons start off with good news from the financial sector, only to have lackluster or disappointing results from the rest of the S&P 500, propped up by rampant buybacks.

What is rare, however, is to have the financials disappoint , yet then seeing the remainder of the market report good or better than expected earnings, particularly as the rate of increase of buybacks may be decreasing.

That is now where we stand with the second week of earnings season ready to begin when the market re-opens on Tuesday.

While there was already some clue that the major money center banks were not doing as well as perhaps expected, as bonuses were cut for many, the expectation has been that the broader economy, especially that reflecting consumer spending, would do well in an environment created by sharply falling energy prices.

Among gyrations this week were interest rates which only went lower on the week, much to the chagrin of those whose fortunes are tied to the certainty of higher rates and in face of expectations for increases, given growing employment, wage growth and the anticipated increase in consumer demand.

Funny thing about those expectations, though, as we got off to a bad start on the surprising news that retail sales for December 2014 didn’t seem to reflect any increased consumer spending, as most of us had expected, as the first dividend to come from falling energy prices.

While faith in the integrity and well being of our banking system is a cardinal tenet of our economy, it is just another representation of the certainty that investors need. That certainty was missing all of this past week as events, such as the action by the Swiss National Bank were unexpected, oil prices bounced by large leaps and falls without ob
vious provocation, copper prices plunged and gold seemed to be heating up.

How many of those did anyone expect to all be happening in a single week? Yet, on Friday, in a reversal of the futures, markets surged adding yet another of those large gains that are typically seen in bearish cycles.

Still, the coming week has its possible antidotes to what has been ailing us all through 2015. There are more earnings reports, including some more from the oil services sector, which could put some pessimism to rest with anything resembling better than expected news, such as was offered by Schlumberger (SLB) this past Friday, which also included a very unexpected dividend increase.

Also, this may finally be the week that Mario Draghi belatedly brings the European Central Bank into the previous decade and begins a much anticipated version of “quantitative easing.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. Additional earnings related trades may be seen in an accompanying article.

Among those big boys with disappointing stories to tell was JP Morgan Chase (JPM). In a very uncharacteristic manner, CEO and Chairman Jamie Dimon didn’t exude optimism and confidence, instead seemingly accepting whatever fate would be assigned by regulators. Of course, some of that resignation comes in the face of likely new assaults on Dodd-Frank, which could only be expected to benefit Dimon and others.

Whether banks and large financial institutions are under assault or not may be subject to debate, but the assault on JP Morgan’s share price is not, as it has fallen about 11% over the past two weeks, despite a nice gain on Friday.

While still above its 52 week low, unless interest rates continue their surprising descent and go lower than 1.8% for a while, this appears to be a long sought after entry point for shares. The volatility in the financial sector is so high that even with an upcoming 4 day trading week the option premium is very rich, reflecting the continuing uncertainty.

More importantly, may be the distinction that Dimon made between good and bad volatility, with JP Morgan having been subject to the bad kind of late.

The bad kind is when you have sustained moves higher or lower and the good kind is when you see a back and forth, often with little net change. The latter is a trader’s dream and it are the traders that make it rain at JP Morgan and others. That good kind of volatility is also what option writers hope will be coming their way.

So far, 2015 is sending a signal that it may be time to take the umbrellas out of storage.

MetLife (MET), with its 30 day period to challenge its designation as a “systemically important” financial institution, decided to make that challenge. As interest rates went even lower this week, momentarily breaching the 1.8% level, MetLife’s shares continued its decline.

If Dimon is correct in his resignation that nothing can really be done when regulators want to express their whims, then we should have already factored that certainty into MetLife’s share price. It too, like JP Morgan, had a nice advance on Friday, but is still about 11% lower in the past 2 weeks and has an upcoming dividend to consider, in addition to earnings a week afterward.

Intel (INTC), a stellar performer in 2014, joined the financials in reporting disappointing earnings this past week. While it did get swept along with just about everything else higher in the final hour of trading, it had already begun its share recovery after hitting its day’s low in the first 30 minutes of trading.

After 2 very well received earnings reports the past quarters, it may have been too much to expect a third successive upside surprise. However, the giant that slid into somnolence as the world was changing around it has clearly reawakened and could make a very good covered option trade once again if it repeatedly faces upside resistance a
t $37.50.

I’m not quite certain how to characterize The Gap (GPS). I don’t know whether it’s fashionable, just offers value or is a default shopping location for families.

What I do know is that among my frequent holdings it has a longer average holding period than most others, despite having the availability of weekly options. That’s because it consistently jumps up and down in price, partially due to its habit of still reporting same store sales each month and partially for reasons that escape my ability to grasp.

Yet, it still trades in a fairly narrow range and for that reason it is a stock that I always like to consider on a decline. Because of its same store sales reports it offers an enhanced option premium on a monthly basis in addition to its otherwise average premium returns, but it also has an acceptable dividend for your troubles of holding it for any extended period of time.

As a Pediatric Dentist, you would think that I would own Colgate-Palmolive (CL) on a regular basis. However, I tend to put option premium above any sense of professional obligation. In that regard, during a sustained period of low volatility, Colgate-Palmolive hasn’t been a very appealing alternative investment. However, with volatility creeping higher, and with shares going ex-dividend this week, the premium is getting my attention.

Together with its recent 6% price decline and its relative immunity from oil prices, the time may have arrived to align professional and premium interests. However, if shares go unassigned, consideration has to be given to selecting an option expiration for a rollover trade that offers some protection in the event of an adverse price move after earnings, which are scheduled for the following week.

Among those reporting earnings this week are Cree (CREE), eBay (EBAY) and SanDisk (SNDK).

Cree is an example of a company that regularly has an explosive move at earnings and may present some opportunity if considering the sale of puts before, or even after earnings, in the event of a large decline.

I have experience with both in the past year and the process, as well as the result can be taxing. My most recent exploit having sold puts after a large decline and eventually closing that position at a loss, and both the process and the result were less than enjoyable.

That’s not something that I’d like to do again, but seeing the ubiquity of its products and the successive earnings disappointments in the past year, I’m encouraged by the fact that Cree hasn’t altered its guidance, as it has in the past in advance of earnings.

I generally prefer selling puts into a price decline, however Cree advanced by nearly 4% on Friday and reports earnings following Tuesday’s close. In the event of a meaningful decline in price before that announcement I would consider the sale of puts. The option market believes that there can be a move of 10.1% upon earnings release, however a 1% ROI can potentially be achieved even when selling a put contract at a strike that is 14.2% below Friday’s close.

Alternatively, in the event of a large drop after earnings, consideration can be given toward selling calls in the aftermath, although if past history is a guide, when it comes to Cree, what has plunged can plunge further.

SanDisk recently altered its guidance and saw its share price plunge nearly 20%. For some reason, so often after such profit warnings are provided before earnings, the market still seems surprised after earnings are released and send shares even lower.

While I’m interested in establishing a position in SanDisk, I’m not likely to do so before earnings are announced, as the option market is implying a price move of 7% and in order to achieve a 1% ROI the strike level required is only 7.5% below Friday’s closing price. That offers inadequate cushion between risk and reward. Because I expect a further decline, I would want a greater cushion, so would prefer to wait until earnings are released.

While Cree and SanDisk are volatile and, perhaps speculative, eBay is a very different breed. However, it is still prone to decisive moves at earnings and it has recently diffused disappointing earnings reports with announcements, such as the existence of an Icahn position or comments regarding a PayPal spin-off.

As opposed to most put sale, where I usually have no interest in taking ownership of shares, eBay is one that, if I sell puts and see an adverse move, would consider taking assignments, as it has been a very reliable covered call stock for the past few years, as its shares have traded in a very narrow range.

Despite a gain on Friday that trailed the market’s advance, it is about 6% below where I last had shares assigned and would be interested in initiating another new position before it becomes a less interesting and less predictable company upon its planned PayPal spin-off.

I tend to like Best Buy (BBY) when it is down or has had a large decline in shares. It has done so on a regular basis since January 2014 and did so again this past week, almost a year to the day of its nearly 33% drop.

This time it was a pin being forced into the bubble that its shares had recently been experiencing as the reality behind its sales figures indicated that margins weren’t really in the equation. Undertaking a “sales without profits” strategy like its brickless and mortarless counterpart isn’t a formula for long term success unless you have very, very deep pockets or a surprisingly disarming and infectious laugh, such as Jeff Bezos possesses.

While possibly selling all of those GoPro (GPRO) devices and other items over the holidays at little to no profit may not have been in Best Buy’s best interests, it may have helped others, for at least as long as that strategy can be maintained.

However, Best Buy has repeatedly been an acceptable buy after gaps down in its share price, although consideration can also be given to the sale of put contracts, as its price is still a bit higher than I would like to see for a re-entry.

Finally, there are probably a large number of reasons to dislike GoPro. For me, it may begin with the fact that I’m neither young, photogenic nor athletic. For others it may have to do with secondary offerings or the bent rules around its lock-up expiration. Certainly there will be those that aren’t happy about a 50% drop from its high just 3 months ago, which includes the 31% decline occurring in the days after the lock-up expiration.

While it has been on a downtrend after the most recent lock-up expiration, despite having traded higher in the days before and immediately afterward, the impetus for this week’s large decline appears to be the filing of a number of patents by Apple (AAPL) which many have construed as potentially offering competition to GoPro in the hardware space, all while GoPro is already seeking to re-invent itself or at least shift from a hardware company to a media company.

I don’t know too much about Apple and I know even less about GoPro, but Apple’s long history has shown that it doesn’t necessarily pounce into markets where there already seems to be a product that is being well received by consumers.

It prefers to pick on the weak and defenseless, albeit the ones with good ideas.

Apple has done incredibly well for itself in recognizing new technologies that might be in much greater demand if the existing products didn’t suffer from horrid design and engineering. Having a fractured manufacturer base with no predominant player has also been an open invitation to Apple to meld its design and marketing prowess and capture markets.

Whatever GoPro may suffer from, I don’t think that anyone has accused the GoPro product line of either of those shortcomings. so this most recent and pronounced decline may be unwarranted. However, GoPro does report earnings in the following week, so I would consider the potential risk associated with a position unlikely to be assigned this week. For that reason I would consider either the purchase of shares and the sale of deep in the money calls or the sale of deep out of the money puts, utilizing a weekly contract and keeping fingers crossed and strapping on for the action ahead.

Traditional Stocks: Intel, JP Morgan Chase, MetLife, The Gap

Momentum Stocks: Best Buy, GoPro

Double Dip Dividend: Colgate-Palmolive (1/21)

Premiums Enhanced by Earnings: Cree (1/20 PM), eBay (1/21 PM), SanDisk (1/21 PM)

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

Posted on

Weekend Update – August 31, 2014

You really can’t blame the markets for wanting to remain ignorant of what is going on around it.

When you’re having a party that just doesn’t seem to want to end the last thing you want to do is answer that unexpected knock on the door, especially when you can see a flashing red and blue light projected onto your walls.

The recent pattern has been a rational one in that any bad news has been treated as bad news. The market has demonstrated a great deal of nervousness surrounding uncertainty, particularly of a geo-political nature and there has been no shortage of that kind of news lately.

On the other hand, the market has thrived during a summer time environment that has been devoid of any news. Over the past four weeks that market has had its climb higher interrupted briefly only by occasional rumors of geo-political conflict.

Given the market’s reaction to such news which seemingly is accelerating from different corners of the world, the solution is fairly simple. But it was only this week that the obvious solution was put into action. Like any young child who wants only to do what he wants to do, the strategy is to hear only what you want to hear and ignore the rest.

Had the events of this week occurred earlier in the summer we might have been looking at another of the mini-corrections we’ve seen over the past two years and perhaps more. The additive impact of learning of Russian soldiers crossing the Ukraine border, Great Britain’s decision to elevate their Terror Alert level to “Severe” and President Obama’s comment that the United States did not yet have a strategy to  deal with ISIS, would have put a pause to any buying spree.

Instead, this week we heard none of those warnings and simply marched higher to even more new record closes, even ignoring the traditional warning to not go into a weekend of uncertainty with net long positions.

To compound the flagrant flaunting the market closed at another new high as we entered into a long holiday weekend. As we return to trading after its celebration the incentive to continue ignoring the world and environment around us can only be reinforced when learning that this past month was the best performing month of August in more than 10 years.

Marking the fourth consecutive week moving higher, the July worries of spiking volatility and a declining market are ancient history, occurring back in the days when we actually cared and actually listened.

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

Bank of America (BAC) may be a good example of ignoring news, although it could also be an example of  the relief that accompanies the baring of news. The finality of its recent $17 billion settlement stemming from its role in the financial crisis was a spur to the financial sector.

Shares go ex-dividend this week and represent the first distribution of its newly raised dividend. While still nothing worthy of chasing and despite the recent climb higher, the elimination of such significant uncertainty can see shares trading increasingly on fundamentals and increasingly becoming less of a speculative purchase as its beta has plunged in the past year.

With thoughts of conflict related risk continuing to be on my mind there’s reason to consider positions that may have some relative immunity to those risks. This week, however, the reward for selling options is unusually low. Not only is the extraordinarily depressed volatility so adversely impacting those premiums, but there are only four days of time value during this trade shortened week. Looking to use something other than a weekly option doesn’t offer much in the way of relief from the low volatility, so I’m not terribly enthusiastic about spending down cash reserves this coming week, particularly at market highs.

Still, there can always be an opportunity in the making. With the exceptions of the first and last selections for this week, like last week I’m drawn to positions that have under-performed the S&P 500 during the summer’s advance.

^SPX ChartThere was a time that Altria (MO) was one of my favorite stocks. Not one of my favorite companies, just one of my favorite stocks, thanks to drawing on the logic of the expression “hate the sin and not the sinner.”

Back in the old days, before it spun off Philip Morris (PM) it was one of those “triple threat” stocks. It offered a great dividend, great option premiums and the opportunity for share gains, as well. Even better, it did so with relatively little risk.

These days it’s not a very exciting stock, although it still offers a great dividend, but not a terribly compelling option premium, especially as the ex-dividend date approaches. However, during a time when geo-political events may take center stage, there may be some added safety in a company that is rarely associated with the word “safe,” other than in a negative context.

Colgate Palmolive (CL) isn’t a terribly exciting stock, but in the face of unwanted excitement, who needs to add to that fiery mix? Last week I added shares of Kellogg (K), another boring kind of position, but both represent some flight to safety. 

Trailing the S&P 500 by 8% during the summer, shares of Colgate Palmolive could reasonably be expected to have an additional degree of safety afforded from that recent decline and that adds to its appeal at a time when risk may be otherwise be an equal opportunity destroyer of assets.

YUM Brands (YUM) and Las Vegas Sands (LVS) both have much of their fortunes tied up in China and both have come down quite a bit during the summer.

YUM Brands has shown some stability of late and I would be happy to see it trading in the doldrums for a while, as that’s the best way to accumulate option premiums. WHile doing bu
siness is always a risk in China, there is, at least, little concern for exposure to other worldwide risks and YUM may have now weathered its latest food safety challenge.

Las Vegas Sands, on the other hand, may not yet have seen the bottom to the concerns related to the vibrancy of gaming in Macao. However, the concerns now seem to be overdo and expectations seem to have been sufficiently lowered, setting the stage for upside surprises, as has been the situation in the past. As with concerns regarding decreased business at YUM due to economic downturns, once you get the taste for fast food or gambling, it’s hard to cut down on their addictive hold.

T-Mobile (TMUS), despite the high profile it maintains, thanks to the efforts of its CEO, John Legere, has somehow still managed to trail the S&P500 during the summer. This past week’s comments by parent Deutsche Telecom (DTEGY) seemed to imply that they would be happy to sell their interests for a $35 price on shares. They may be willing to take even less if a potential suitor would also take possession of John Legere, no questions asked.

I think that in the longer term the T-Mobile story will not end well, as there is reason to question the sustainability of its strategy to attract customers and its limited spectrum. It needs a partner with both cash and spectrum. However, since I don;t particularly look at the longer term picture when looking for weekly selections, I’m interested in replacing the shares that were assigned this past week, as its premium is very attractive.

Whole Foods (WFM) is another position that I had assigned this past week, while I still sit on a much more expensive lot. On the slightest pullback in price, or even stability in share price, I would consider a re-purchase of shares, as it appears Whole FOods is finding considerable support at its current level and has digested a year’s worth of bad news.

In an environment that has witnessed significant erosion in option premiums, Whole Foods has recently started moving in the opposite direction. Its option premiums have seen an increase in price, probably reflecting broader belief that shares are under-valued and ready to move higher. Although I’ve been adding shares in an attempt to offset paper losses from that more expensive lot, I believe that any new positions are warranted on their own at this level and would even consider rolling over positions that are likely to be assigned in order to accumulate these enriched premiums.

I currently have no technology sector holdings and have been anxious to add some. With distrust of “new technology” and “old technology” having appreciated so much in the past few months, it has been difficult to find suitable candidates.

Both SanDisk (SNDK) and QualComm (QCOM) have failed to match the performance recently of the S&P 500 and may be worthy of some consideration, although they both may have some more downside risk potential during a period of market uncertainty.

Among challenges that QualComm may face is that it is not collecting payment for its products. That is just another of the myriad of problems that may confront those doing business in China, as QualComm, and others, such as Microsoft (MSFT), may not be receiving sufficient licensing fee payments due to under-reporting of device sales.

In addition, it may also be facing a challenge to its supremacy in providing the chips that connect devices to cellular networks worldwide as Intel (INTC) and others may be poised to add to their market share at QualComm’s expense.

For those believing that the bad news has now been factored into QualComm’s share price, having resulted in nearly a 7% loss as compared to the S&P 500 performance, there may be opportunity to establish a position at this point, although continued adverse news could test support some 6% lower.

SanDisk certainly didn’t inspire much confidence this week as a number of executives and directors sold a portion of their positions.

I don’t have any particular bias as to the meaning of such sales. SanDisk’s price trajectory over the past year certainly leaves significant downside risk, however, the management of this company has consistently steered it against a torrent of  pessimistic waves, as it has survived commoditization of its core products. The risk of share ownership is mitigated by its option premium, that has resisted some of the general declines seen elsewhere, perhaps reflective of the perceived risk.

Finally, Coach (COH) has recently been in my doghouse, despite the fact that it has been a very reliable friend over the course of the past two years. But human nature being what it is, it’s hard to escape the question “what have you done for me lately?”

That’s the case because my most recent lot of Coach was purchased after earnings when it fell sharply and then surprised me by continuing to do so in a significant manner afterward, as well. Unlike with some other earnings related drops over the past two years this most recent one has had an extended recovery period, but I think that it is finally getting started.

The timing may be helped a little bit with shares going ex-dividend this week. That dividend is presumably safe, as management has committed toward maintaining it, although some have questioned how long Coach can continue to do so.

I choose not to listen to those fears.

Traditional Stocks: Altria, Colgate Palmolive, QualComm, Whole Foods, YUM Brands

Momentum:  Las Vegas Sands, SanDisk, T-Mobile

Double Dip Dividend: Bank of America (9/3), Coach (9/5)

Premiums Enhanced by Earnings: none

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

Posted on

Weekend Update – July 13, 2014

In the past month Janet Yellen has reaffirmed the commitment to keeping stocks the preferred investment vehicle yet after the initial euphoria, skepticism and askance looks greeted any attempts to set even more new record highs.

For stock investors the greatest gift of all was there, delivered on a platter, just waiting to be taken advantage of this past week. But we didn’t do so, maybe having learned a lesson from Greek mythology and avoiding obvious and superficial temptation.

Unfortunately, the application of that lesson may have been misguided as the temptations offered by the Federal Reserve had already run fairly deep, having already been acknowledged to have fueled much of the years long rally in stocks.

Instead of focusing on accepting and making good use of the gifts this past week it didn’t take long to re-ignite talk of the beginning of the long overdue correction after a failed start to the week’s trading.

The week itself was a bizarre one with some fairly odd stories diverting attention from what really mattered.

There was the frivolous news of a wildly successful potato salad Kickstarter campaign, the inconsequential news of the demise of Crumbs (CRMB), the laughably sad news of the sudden appearance of a seemingly phony social media company in Belize with a $5 billion market capitalization while the SEC slept and feel good news of LeBron James taking his talents back to the fine people of Cleveland.

Somewhere in-between was also the news that a Portuguese bank was having some difficulty paying back short term debt obligations.

Talk of an impending correction came before this week’s FOMC statement release, which did much to erase the previous two days of weakness, but it was short lived, as fears related to the European banking system swept through the European markets and made their ways to our shores on Thursday.

This was yet another week when the market wasn’t willing to accept the assurance of continuing gifts from the Federal Reserve after the initial giddiness upon the delivery of its news. While we all know that sooner or later the gifts from the Federal Reserve will slow down and then stop altogether in advance of that time when it actually begins to impede our over-fed avarice, there isn’t too much reason to refuse the gifts that are still there to be given. While perhaps those gifts could be viewed as an entitlement perhaps the additional lesson learned is that we are resilient enough to not allow a natural sense of cautionary behavior to be disarmed.

Somehow, I doubt that’s the case, just as I doubt that Greek mythology has taught very many or lasting lessons to many of us lately.

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

Puts I sold on Bed Bath and Beyond (BBBY) that I sold a few weeks ago expired this past week, as they were within easy range of assignment or in need of rollover on Friday until murmurings of a leveraged buyout started to lift shares.

Had those murmurings waited until sometime on Monday I might have considered them as a gift, as I wanted to now add shares to my portfolio. However, coming as they did, although securing the ability to see the puts sold expire worthless, may have snatched a gift away, as I rarely want to chase a stock once it has started moving higher. However, on any weakness that see shares trading lower to begin the week, I would be anxious to add shares as I believe Bed Bath and Beyond was already in recovery mode from the strong selling pressure after it reported earnings a few weeks ago.

The Gap (GPS) continues to be one of the dwindling few that report monthly sales statistics. As it does, it regularly has paroxysms of movement when those statistics are released. Rarely does it string together more than two successive months of consistent data, such that its share price bounces quite a bit, despite shares themselves not being terribly volatile in the longer run. Those movements often provide nice option premiums and makes The Gap an attractive buy, although it can also be a frustrating position, as a result. However, it is one that I frequently like as part of my portfolio and currently do own shares. This most recent report on Friday don’t send shares moving as much as in the recent past, however, it did create an opportunity to consider the addition of more shares.

With earnings season beginning to high gear this week there is no shortage of potential candidates. However, unless most weeks when considering earnings related trades I only think in terms of put sales and would prefer not to own shares.

That is certainly the case with SanDisk (SNDK).

The option market believes that there may be a 6.6% movement in either direction next week upon earnings being released. However, a 1.1% ROI can potentially be achieved at a strike level that is outside of the range implied by the option market, making it an appealing trade, if willing to also manage the position in the event that assignment may be likely by attempting to roll over the put sale to a new time period.

On the other hand both Blackstone (BX) and Cypress Semiconductor (CY) are shares that I would want to own
at a lower price and would consider accepting assignment rather than rolling over and trying to stay one step ahead of assignment.

In the case of Cypress Semiconductor, whose products are quietly ubiquitous, since it has only monthly options available, there aren’t good opportunies to try such evasive techniques, so being prepared for ownership is a requisite if selling puts. Shares have traded in an identifiable range, so if assigned and patient there’s liukely to be an escape path while collecting option premiums and perhaps dividends, as well.

Blackstone is off from its recent highs and has been a beneficiary of the rash of IPO offerings of late. While I wouldn’t mind owning shares again at this level, the fact that it offers many expanded weekly options does allow for the possibility of managing the position through rollovers in the event that assignment may be imminent. However, with a generous dividend upcoming there may also be reason to consider ownership if assignment may be likely.

Finally, A stock that I love to own is Fastenal (FAST). To me it represents a snapshot of the US economy. Depending on your perspective when the economy does well, Fastenal does well or when Fastenal is doing well the economy is doing well. While that’s fairly simple and easy to understand, even if not entirely validated, what is always less easy to understand is how a stock responds to its earnings reports. In this case shares of Fastenal tumbled as top line numbers were very good, but margins were decreasing.

While that may not be great news for Fastenal and it certainly wasn’t for its shareholders today, the growth in sales revenues may be a positive sign for the economy. For me, the negative response provides opportunity to once again own shares and to do so as either a potential short term purchase or with a longer term horizon.

While Fastenal trades only monthly options with this being the final week of the July 2014 cycle it could potentially be purchased with the mindset of a weekly option trader. However, in the event that shares aren’t assigned, they do go ex-dividend the following week, so there may be reason to consider immediately considering an August 2014 option in hedging the share purchase.

Traditional Stocks: Bad Bath and Beyond, Fastenal, The Gap

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackstone, Cypress Semiconductor, SanDisk

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

Posted on

Weekend Update – October 13, 2013

This week I’m choosing “risk on.”

For about 6 months I’ve been overly cautious, having evolved from a fully invested trader to one starting most weeks at about 40% cash reserves and maintaining about 25-30% by week’s end after initiating new positions.

Despite the belief that something untoward was right around the corner, the desire for current income through the purchase of stocks and the sale of options has been strong enough to temper the heightened caution on an ongoing basis for much of the past half year.

With uncertainty permeating the market’s mood, eased by late last week’s glimmer of hope that perhaps a short term debt ceiling increase may be at hand, “risk on” isn’t the most likely of places to find me playing with my retirement funds, but that’s often where it’s the most interesting, especially if the risk is one of perception more than one of probability.

While we may all have different operational definitions of what constitutes “risk” I consider beta, upcoming known market or stock moving events, the unknown, past price history and relative performance. Tomorrow the formula may be entirely different, as may tolerance for risk or willingness to burn down the cash reserves.

However, trying to dispassionately look at the current market and all of the talk about a correction, one metric that I’ve been using for the past few months reminds me that we’re doing just fine and that risk is still tolerable, even in the context of uncertainty.

Although I continue to believe that we can’t just keep moving higher, I’m not quite as dour when seeing that we are essentially at the same levels the S&P 500 stood on May 21, 2013 and June 18, 2013.

Those dates reflect relative high points, each of which gave way to the FOMC minutes or a press conference by Federal Reserve Chairman Bernanke.

In fact, we’re actually at a higher level than either of those two previous peaks, now trailing only the all time high of September 18, 2013 by less than 1.5%. So all in all, not too bad, especially since that 50 Day Moving Average that was breached by the S&P 500 earlier in the week was quickly remedied and the 200 Day Moving Average remains relatively distant.

From May 21 to June 5, then from June 18 to June 24, August 2 to 27 and finally September 19 to October 6, we have gone down a combined 16.7% in a cumulative trading period of 13 weeks or the equivalent of a quarter.

What more do you want? Armageddon?

For the past few months I’ve been focusing increasingly on new positions that have been trading below the May and June highs and preferably under-performing the S&P 500 at the same time. However, within that framework I’ve focused increasingly on near term dividend paying stocks and those more likely to fall into the “Traditional” category, typically low beta and attempting to avoid any known short term risk factors.

That has meant fewer “Momentum” positions and fewer earnings related trades. But up until Friday’s continuation of the hope induced rally, I had a number of “Momentum” stocks on my radar, all of which I had already owned and anticipated being assigned, but ripe for re-purchase in the pursuit of risk heightened premiums, but with less risk than readily apparent.

As it turned out Abercrombie and Fitch (ANF) got caught up in The Gaps’ same stores problem and whip-sawed in trading and I ultimately rolled over the position. Meanwhile, Mosaic (MOS) fell as investors were somehow surprised that Potash (POT) adjusted its guidance downward to reflect lower prices stemming from a collapse of the cartel.

As it would turn out Phillips 66 (PSX) was assigned, but soared, making it too expensive for repurchase, but that can change very quickly.

This week there are two deadlines. One is the end of the October 2013 option cycle, but the other is October 17, 2013, which Treasury Secretary Jack Lew proclaimed to be the day after which none of his “tricks” would be able to sustain the Treasury’s count and be able to pay our bills.

In a word? That’s when we would see the United States go into default on its obligations.

Under Senate questioning last week Lew acquitted himself quite well and demonstrated that he wasn’t very patient with regard to suffering fools. Uncharacteristically there appeared to be less self-aggrandizing statements in the form of questions coming from the committee members.

It may not be entirely coincidental that minutes after Lew’s appearance, House Speaker Boehner’s office announced that the Speaker would be making a statement reflecting upcoming meetings with the Administration, reflecting the possibility of some agreement.

For those that remember past such budgetary crises, you’ll recall that the market typically reacted to the hopes and then crashed along with the dashed hopes, in an eerily rhythmic manner.

On Saturday morning, word came from Eric Cantor (R-VA) that President Obama rejected the House offer. Unusually, GOP leadership skipped the opportunity to step up to the microphone to push their version of righteousness.

This week, in anticipation of the possibility of dashed hopes as may come from an appearing setback, my definition of “risk
on” includes positions already trading at depressed levels.

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).

For dividend lovers this week offers Footlocker (FL), Colgate (CL) and Caterpillar (CAT). All under-performing the S&P 500 YTD.

Colgate, however, is higher than its June 2013 high and has a surprisingly high beta, despite the perceived sedate nature of being a consumer defensive stock. Perhaps that combination makes it a “risk on” position for me. Coupled with a dividend that is lower than the overall S&P 500 average it may not readily appear to be worth the time, but then again, how much additional downside should accrue from a US default?

I already own two lots of Footlocker and three is generally my limit, as it precluded including Mosaic in this week’s recommendations. Footlocker doesn’t report earnings until the December 2013 option cycle, so a little bit of risk is removed, although in the world of retail you are always at risk for any of your competitors that may still report monthly comparison data, just look at the pall created by The Gap (GPS) and L Brands (LTD) this past week.

While a pall was created by L Brands and it is higher than those referenced high points it is now down a tantalizing 10% in a week’s time. I’ve already owned shares on five separate occasions this year and have been waiting for an opportunity to do so again. It is a generally reliably trading stock that had simply climbed too far and for a month’s time traveled only in a single direction. That’s rarely sustainable. The combination of premium and dividend makes L Brands worthy of consideration in a sector that has been challenged of late. The lack of weekly options makes ownership less stressed by day to day events for those otherwise inclined to like weekly options.

Not to be outdone, Joy Global (JOY) is a stock that’s been worth owning on 7 distinct occasions this year. It has consistently traded in tight range and has been able to find its way home if temporarily wandering. High beta, well underperforming the S&P 500 and lower than both of the two earlier market high points continues to make it an appealing short term selection, especially with earnings still so far off in the future.

I’ve been waiting to add shares of Caterpillar for a while, having owned it only four times in 2013, as compared to nine occasions in 2012. However, the upcoming dividend makes another purchase more likely. Despite the thesis advanced by short seller Jim Chanos against Caterpillar, it has, thus far continued to maintain its existence in a tight trading range, making it an excellent covered option candidate.

JP Morgan Chase (JPM) reported its earnings this past Friday and reported a loss for the first time under Jamie Dimon’s watch. Regardless of your position on the merits of the myriad of legal and regulatory cases which have resulted in spectacular legal fees and fines, JP Morgan has acquitted itself nicely on the bottom line. While there is still unknown, but tangible punishment ahead, for which shareholders are doubly brutalized, I think a sixth round of share ownership is warranted at this price level.

Williams Sonoma (WSM) was one of the first stocks that I purchased specifically to attempt to capture its dividend and have it partially underwritten by an option premium. It fell a bit by the wayside as weekly options appeared on the scene. However, as uncertainty creeps into the market there is a certain comfort that comes from a monthly or even longer term option contract. WHile it has come down nearly 15% in the past two months and is now priced lower than during the May and June market highs, Williams Sonoma’s dirty little secret is that it has still outperformed the S&P 500 YTD by a whisker.

SanDisk (SNDK) had its eulogy written many years ago when flash memory was written off as being simply a commodity. Always volatile, especially in response to earnings, which have seen plunges on each of those last two occasions, now may not be the time to believe that “the third time is a charm,” although I do. Despite that, my participation, if any, would be in the sale of out of the money puts, as the options market is implying a move of approximately 7% and that may not be aggressive enough, given past history.

FInally, Align Technology (ALGN) reports earnings this week. In the business of making orthodontic therapy so easy that even a monkey could do it, the company’s prospects have significantly improved as its treatment solutions are increasingly geared toward children. That’s important because their traditional customer base, adults, views orthodontic treatment as discretionary and, therefore, represents an economically sensitive purchase. But most anyone with kids knows that orthodontic treatment isn’t discretionary at all. It can be as close to life and death as you would like to experience. This kind of orthodontic care represents a new profit center for many dental offices and a boon to Align Technology. While I expect good earnings numbers, shares have already had a 13% price decline in the past two weeks. I would most likely consider entering a position by means of selling out of the money puts. In this case for a single week’s position, if unassigned, as much as a 12% price drop could still yield a 1.3% ROI, as the options market is implying a 9% e
arnings related move.

Traditional Stocks: JP Morgan, L Brands, Williams Sonoma

Momentum Stocks: Joy Global

Double Dip Dividend: Caterpillar (ex-div 10/17), Colgate (ex-div 10/18), Footlocker (ex-div 10/16)

Premiums Enhanced by Earnings: Align Technology (10/17 PM), SanDisk (10/16 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.