Sometimes you just get blindsided and even hindsight is inadequate in explaining what just happened.
There’s very little reason to ever get hit in the face, as human instinct is to protect that vulnerable piece of anatomy.
Yet, sometimes there’s a complete absence of anticipation or lack of preparation for fast, unfolding events.
Sometimes you just get lulled into a sense of security and take your eye off events surrounding you.
Granted, sometimes your inattention helps you to avoid doing the logical thing and missing out on something wonderful, but more often than not, there is a price to be paid for inattention.
When I first started writing a blog. there was a 417 point decline in the DJIA on the third day of that blog.
That was in 2007 when 417 points actually stood for something.
This past Friday’s nearly 400 point decline was minimal, by comparison.
Back in 2007, the culprit for the decline was a nearly 9% drop in the Chinese stock market. It was easy to connect the dots and honestly, you had to see some collapse coming in that market, at that time, as most everyone was beginning to openly question the veracity, validity and credibility of economic and corporate reports coming from China.
I suppose that there was some kind of identifiable culprit this past Friday, as well, but after a very quiet and protracted period following the recovery from the “Brexit” sell-off, there was little reason to suspect that it would happen on Friday.
Sure, there were the fears of an interest rate increase being now more likely to come in just 2 weeks, but there has already been plenty of indication that investors have already accepted an increase is likely in December. Why would those few months make such a big difference in confidence?
The answers are pre-programmed.
“The market doesn’t like uncertainty,” or “investors took the opportunity for some profit taking.”
Of course, there will always be someone who can squint enough and stare at chart formations long enough to see the “obvious” warning signs in hindsight, but there was really very little reason to have seen the sell-off coming.
The march higher by the market after “Brexit” fears disappeared was orderly and we’ve gone though a nice period of stability.
Boring, perhaps, but when is stability exciting?
Perhaps it’s when you’re defenses are down and you get lulled into a state of comfort, that you’re at greatest risk for being smacked in the face.
I certainly didn’t see Friday’s decline coming, but if you do look at the recent back and forth large movements in energy and precious metals, you have to believe that there are some tectonic plates shifting, as investors see and the flee perceived opportunities in other complexes.
Living and playing near a fault line, people are still shocked when the earth rumbles and are often unprepared for the suddenness.
They also often go back to their old way of doing things after the dust settles. After all, if you believe that you live in paradise, why would you turn your back on that just because of a rumble or two?
How do you resist the ongoing reward so f a paradise that has treated you so well in the past?
The market shook on Friday and there will undoubtedly be more of those rumbles, but it’s hard to not want to go back and take your eye off the obvious.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
Among the things that no one could possibly have seen as coming would have been the news surrounding Wells Fargo (WFC) this past week.
We do expect banks to sometimes take on strategies that walk a fine line, as there is often great reward when you walk the edge.
We also expect that there may be an occasional employee with larceny in his heart who takes advantage of whatever exists to be exploited. Sometimes, there are even small groups of employees working toward illicit ends, such as in the cult film “Office Space.”
But what we don’t expect is that there may be 5,000 employees working toward such illicit ends, opening credit accounts on behalf of unknowing consumers and certainly without their consent and only to their detriment.
We also don’t expect that such an undertaking could possibly have flown under the radar at any company. People being people, you might expect that one of those 5,000 would have made an inopportune comment that would have been overheard by a supervisor, or at least a co-worker who was not sympathetic to such a violation of trust.
Wells Fargo, for its part fired 5,000 people.
They paid a $185 million fine on a profit of about $23 billion.
That’s the rough equivalent of a miserly tip at an “Early Bird Special” and is probably less than the personnel savings over the course of a year.
Of course, there may still be another shoe to drop.
In the meantime, shares fell on Friday. However, while they fell more than others in the financial sector, the decline was right in line with the S&P 500.
If most past egregious corporate errors are any indication, the fines paid are irrelevant and recovery is ahead. Of course, if the market decides to “sell on the news” when the FOMC finally does increase interest rates, there may be yet another shoe.
In the meantime, the sell-off on Friday may offer a near term opportunity, as options premiums are reflecting increased risk, even as the financial sector may be in line to finally realize the potential that has been pegged to a rising interest rate environment.
There is no doubt that retail is challenged right now and even a vaunted retailer like Macy’s (M) is hurting and shuttering scores of stores in response to the challenges coming from the wall-less retailer behemoth.
I already own 2 lots of Macy’s and with its continued recent weakness and an upcoming ex-dividend date, see the opportunity to add even more shares.
Just as Wells Fargo and others are bound to benefit from an increasing interest rate environment, Macy’s should start benefiting from a more engaged consumer, assuming that the FOMC’s decision to raise interest rates is partially based upon evidence of that occurring.
As with banks, the retail hypothesis has been incubating for a long, long time. The expectations that both would thrive as the economy started heating up, is making many grow weary.
Still, Macy’s is making some hard choices and there should be some reward accruing to its bottom line, even as revenues will fall.
What we have seen during the most recent earnings season is that the investor is willing to over-react to any retail news, but were especially eager to reward anything resembling news that wasn’t as bad as expected or anything resembling positive guidance.
At the first hint of such positive guidance or a better than expected bottom line, a smaller and leaner Macy’s will surge.
What will probably not surge, even if a buyer comes forward, is Twitter (TWTR).
It appears as if a ceiling exists for this company that has a product that many use, but many more do not, because of a lack of understanding of its utility.
If that utility could be understood, perhaps the C-suite at Twitter could then understand how to really monetize the platform, but I’m not entirely certain they would know how to do it if the opportunity stared them in the face.
The near term question about Twitter is just how low the stock can go, as there may be a developing sense of urgency regarding its prospects under its current leadership team.
After having had a great year with Twitter in 2014, both professionally and personally, I use it far less often and trade it far less often.
I still have a very expensive lot of Twitter shares have provided no premium income for far too long, but that I am now likely to put back on the block, even at the risk of losing shares to an assignment price far below the purchase price.
However, with Twitter in sharp focus and with the possibility of a ticking clock, I am interested in adding shares and selling calls or simply selling puts.
If doing so, my intention would be to keep the trade alive and serially selling calls or puts, even if having to roll over to a longer term strike, in the event of another adverse price move.
As with just about every investment, there has to be consideration of the risk – reward proposition. Twitter, for as far into the future as I can see, will represent significant risk, but I like the idea that there may be a finite time period before desperation really hits the leadership or the Board of Directors.
During that time, there may be multiple opportunities to capitalize on the enhanced option premiums, as long as there is still a belief that Twitter will be an appealing property for someone to own at a price not terribly far below its all time lows.
Finally, if only I could somehow erase a $28 lot of Marathon Oil (MRO) that I still own and that hasn’t produced any income for me lately, Marathon Oil would be may favorite stock.
At least for 2016, as with the assignment of some shares this past week, I’ve now owned it on 7 occasions this year.
At mid-week, even as shares were in the money, I was hoping to be able to roll the shares over, as the premium is still reflective of its volatility, but the risk-reward proposition when it is in the money can be compelling.
How often can you find a situation that even a 3-4% decline in share price could still deliver a 1% ROI for a week, during a week when there is no particular news or company related events, such as earnings, scheduled?
As the week wore on and Marathon Oil went well above my $15 strike, the reward for the rollover could no longer keep up with the opportunity costs of passing up a chance to take the assignment proceeds and plow them into something else.
But with Friday’s plunge the opportunity costs were erased. It was just that I couldn’t get the trade made, not that I didn’t want to get it made.
That, though, leads to Monday morning and I would be eager to add Marathon Oil, in some form, back into my portfolio in the event of any additional weakness.
Even if that weakness is subdued and even if there is continued downside as energy prices may continue their volatility and propensity for short term spikes and plunges, there is nice liquidity in the options and lots of opportunity to tailor a strategy using extended weekly options, if necessary.
In the event of some weakness, I may be inclined to consider the sale of puts, rather than a traditional buy/write, but that decision could be altered by a penny or two difference in the net costs.
While I still bemoan that $28 lot and still hold out some hopes of getting it to again become a contributing member of my income producing portfolio, these cheaper lots of Marathon Oil have helped to soften the pain.
While some think of the process of adding shares when they have plunged, as “throwing good money after bad,” I still think of it as “having a child to save a life.”
Traditional Stocks: Wells Fargo
Momentum Stocks: Marathon Oil, Twitter
Double-Dip Dividend: Macy’s (9/13 $0.38)
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.