Weekend Update – September 4, 2016

These are sensitive times.

For the longest time the FOMC and investors were the closest of allies.

The FOMC gave investors what they craved.

With cheap money increasingly made available investors could do what they want to do the most.

Invest.

In return, if you believe in trickle down economics, the great wealth created by investors would then get re-invested into the economy, helping to fund the creation of jobs, which in turn would fuel increasing demand for consumer products.

That would result in a virtuous cycle that would grow the economy, with the FOMC carefully controlling growth to keep the 40 years’ worth of inflation fears soothed.

Surely that was a win – win scenario, in theory, at least.

Then came the rumors.

Those rumors were started, fueled and spread by the very FOMC that created good times for most everyone that had a discretionary dollar to invest.

The fear that those rumors of an interest rate increase coming soon, perhaps a series of them in 2016, would become reality, periodically sowed selling waves into the blackened hearts of investors.

With even the doves among the FOMC members beginning to utter tones spoken by hawks, investors knew that their glory days were numbered and began expressing some slow acceptance of an interest rate increase.

It’s not as if they really had any choice, although it was also clear that any evidence of consumers slowing down or not living up to their expectations would send the FOMC into a bit of a retreat, which in turn would send investors into a subdued celebratory mode.

What had become clear, however, over the past few months is that the acceptance is begrudging at best, as it is more accepted in theory rather than in reality.

Investors have shown an uneasy acceptance of an interest rate hike, as long as it comes later and not sooner.

That was abundantly clear this past week as the disappointing Employment Situation Report data was initially interpreted by investors as meaning that the probability of an interest rate increase announcement coming at this month’s FOMC meeting was less likely.

Markets moved nicely higher on the notion that there was going to be another few months of cheap money to fuel the party.

But then came word from among the top leaders of the FOMC and Federal Reserve that conditions were still being met for an interest rate increase in September and investors did what they usually do when fear or loathing is part of the equation.

The FOMC and investors simply continued playing the game that they’ve been playing for much of 2016, having established an uneasy truce, while awaiting for the other side to blink.

At some point, this truce will either fall apart or the sides will embrace one another.

For all of their obfuscation and for all of the confusing economic data, there is still little sign that retailers are ready to tell us that stores are crowded and inventories are being depleted.

The FOMC seems to have erred once when raising interest rates almost a year ago. The market’s decline in the period afterward wasn’t with foresight of the lack of economic growth to come.

It was due to disappointment that the party was slowing down.

The subsequent recovery has all come as thoughts of extending the party have taken hold.

Now, though, I think we are ready to move forward, even if taking a short term step backward upon the reality of another interest rate increase, in anticipation of the FOMC not making the same mistake twice.

But, I wouldn’t mind waiting until December. It might not be a bad idea for the FOMC to be behind the curve this time, to allow the current uneasy truce to give way to renewed investor confidence based upon an expanding economy and a return to investing based upon fundamental factors.

Nothing spells peace better than two independent and healthy entities going about their own businesses side by side.

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

Volatility is painfully low and there are only 4 trading days in the current week, so weekly option premiums are going to be even less appealing.

On top of that, with earnings season essentially having come to its end, all that remains is an FOMC watch and then the reaction to its action or inaction.

For me, that just leaves more uncertainty, but without the reward.

Because of that, my predominant focus is on securing more dividends, if possible.

For the week, that leaves me in consideration of adding shares of Coach (COH), General Motors (GM) and the recently added GameStop (GME).

I currently own all three of those and see opportunity in all three, not just for the upcoming dividends, but also for their option premiums and some chance for capital appreciation, as well.

Generally, when I do consider positions going ex-dividend, I try to exploit any possibility of a pricing inefficiency that would have some of the decrease in the share price coming as a result of the dividend, being borne by the option buyer.

As a result, I usually try to sell in the money call options generally being happy with either early assignment or receiving the dividend.

This week, however, I’m more inclined to consider the sale of slightly out of the money calls or may consider longer term expirations.

I purchased GameStop following its fairly muted decline, by its historical standards, following recent earnings, specifically with the dividend in mind.

Shares have been trading fairly well on the heels of its bad news and have shown some stability. While GameStop has had “another shoe to drop” in the past, I think that the near term opportunity is to exploit both its price decline and generous dividend.

There’s no question that its business model has challenges, but those challenges have been constant and evolving over the years, while GameStop has adapted, evolved and persisted.

I don’t look at GameStop as a long term holding, but it is a stock that may also be amenable to serial rollover, which has been my primary activity in 2016, as my overall trading activity has taken a dive even from 2015, which itself was a low trading volume year.

Coach and General Motors appeal to me at the moment for different reasons.

I like Coach following having given back some recent gains, which returns it to a support level that appears to have some holding ability. With few people now questioning its long term strategy or ability to compete, Coach continues to build its base and make itself more accessible to more consumers.

Unlike GameStop, I would consider any new positions in Coach as a potential longer term holding and would also consider it a serial rollover vehicle that also happens to have an appealing dividend.

I like General Motors at the moment, not because of its recent price decline, but rather for its recent price stability.

It doesn’t have the same kind of price supports that Coach has, however, it too, may be considered as a longer term holding with a very attractive dividend and option premiums, as long as the share price remains in its current neighborhood.

With volatility continuing so low and the longer term trend continuing higher, it’s difficult to buck the trend, so a longer term perspective with positions such as Coach and General Motors may be appropriate under current market conditions.

Finally, with so many now believing that the financial sector may finally awaken as interest rate increases seem likely, I think that I may finally be ready to secure my first position in PayPal (PYPL).

There is no dividend, but what really appeals to me since its spin off from eBay (EBAY) is the well defined trading range and liquidity of its options.

The availability of extended weekly options makes it also a candidate for serial rollovers as it continues to offer an attractive premium, despite having traded in a fairly narrow range.

Ultimately, the ideal application of a covered option strategy, in my opinion, is when that combination of price stability and attractive option premium exists alongside liquidity.

If that kind of co-existence is possible, surely investors and the FOMC can figure out a way to move forward as 2017 approaches.

Traditional Stocks: none

Momentum Stocks: PayPal

Double-Dip Dividend: Coach (9/8 $0.34), GameStop (9/7 $0.37), General Motors (9/7 $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.

Weekend Update – August 28, 2016

I’m not entirely certain I understood what happened on Friday.

While it’s easy to understand the “one – two” punch, such as memorialized in Tennessee Ernie Ford’s song “Sixteen Tons,” it’s less easy to understand what has happened when a gift is so suddenly snatched away.

After not having attended the previous year’s Kansas City Federal Reserve Bank hosted soiree in Jackson Hole, this year Janet Yellen was there.

She was scheduled to speak on Friday morning and the market seemed to be biding its time all through the week hoping that Friday would bring some ultimate clarity.

Most expected that she would strike a more hawkish tone, but would do so in a way as to offer some comfort, rather than to instill fear, but instead of demonstrating that anticipation by buying stocks earlier in the week, traders needed the news and not the rumor.

The week was shaping up like another in a string of weeks with little to no net movement. Despite the usual series of economic reports and despite having gone through another earnings season, there was little to send markets anywhere.

Most recently, the only thing that has had any kind of an impact has been the return of the association between oil prices and the stock market and we all know that the current association can’t be one that’s sustainable.

So we waited for Friday morning.

After having sifted through that morning’s GDP release, which revealed another quarter of soft numbers, showing the economy may not have been growing very strongly, it was time to listen to what Janet Yellen was prepared to say after nearly 2 months of silence.

But first, buried within those GDP numbers was an indication that the consumer may have finally started participating in the economy by spending their money on actual consumer goods. Since 70% of the GDP is based upon consumer activity, that has to be a good sign and one that many have been waiting to see evidenced for far more than a year.

That consumer participation may have come as some news to Macy’s (M)., Kohls (KSS) and others that had little good to say about the past quarter and nothing good to say about the one upcoming.

But as with most things, messages are mixed.

In this case, though, Janet Yellen didn’t really offer a mixed message.

More precisely, however, what she said wasn’t interpreted as being a mixed message.

Investors moved the market nicely higher on hearing Yellen say that “the case for an increase in the federal funds rate has strengthened in recent months,” 

She didn’t really offer any guidance as to what else the FOMC had to see before finally raising rates, but most investors interpreted her comments as indicating that there was an even chance of that occurring at the FOMC’s December policy meeting.

They liked that.

That meant that there was still another 3 months of cheap money to play with and stock investors love cheap money as much as bond investors do not.

What stock investors apparently didn’t like was when Stanley Fischer suggested that there could still be more than one rate hike between now and the end of 2016.

In what could only be interpreted as “too much of a good thing,” the very idea of what we were all set up to expect a year ago, that is an upcoming year of small, multiple interest rate increases, began to bring sellers up front.

And so as the day and the week came to their ends, it was Stanley Fischer who ruled and demonstrated that whatever embrace investors had made of the idea of raising interest rates, it was pretty half hearted and a highly qualified endorsement.

The order of things often makes a difference.

If I knew that I was being faced with one hand that would give and the other hand that would take away, I would much prefer that the giving hand closed the show.

You can only appreciate loss if you’ve actually had something to lose and you can only really appreciate receiving a gift after having had nothing.

Unfortunately, the order of giving and taking left us with nothing but questions and uncertainty.

I’m not sure that’s what anyone intended, but if you look at the past year’s worth of statements and speeches from the various members of the FOMC, you might believe that a third mandate has been added to the Federal Reserve’s short list.

If so, they’ve been wildly successful in sowing confusion and giving and taking hope and confidence away from anyone paying attention.

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

Bristol Myers Squibb (BMY) may be a recent good example of the market’s buyers giving and the market’s sellers taking away.

It may also be a poster child for the old “you live by the sword, you die by the sword” expression, as it shares plummeted following some poorer than expected results from its late stage trials for an advanced non-small cell ling cancer drug.

That plummet took it to its yearly lows and while not too much time has passed, it may be stabilizing and ready fro participation again.

The option market, for whatever it may know, isn’t predicting too much movement in the upcoming week, but my sights are set a little longer term for this trade.

Bristol Myers Squibb is ex-dividend on October 5th, at a current 2.6% yield. It also reports earnings on October 27th.

That leaves consideration of the sale of an October 21st monthly contract in an effort to capture the dividend, capture nearly 2 months of premium and perhaps hold the stock long enough for some price recovery.

It also avoids the risk of earnings, as long as shares are assigned.

If not, I would consider rolling the expiring options over to either the November or December monthly contracts, or perhaps one of the extended weekly expiration dates.

Sinclair Broadcasting (SBGI) isn’t a terribly exciting stock, but it is one that i like to own and I’m especially drawn to it if it’s about to be ex-dividend and trading at or below the mid-point of its most recent range.

Those are all the case for Sinclair Broadcasting at the moment and I’m considering either the sale of an in the money call, with the intent of a quick exit from the position due to early assignment or a near the money strike, with the hopes of capturing the dividend and some small gains on the shares, as well.

Among the things I like about Sinclair Broadcasting is that it is relatively immune form many of those things that can weigh down stocks and that are completely unpredictable and out of anyone’s control.

Currency exchange rates, the price of oil and natural disasters come to mind. Where Sinclair broadcasting may be vulnerable, albeit along with most everyone else, is in an increasing interest rate environment, as assembling the broadcasting portfolio that it has in an expensive undertaking.

Even though my preference would be for a short term exposure, I’ve held shares before for longer time periods, partly because only monthly options are available. Additionally, if in a position to see short calls expire, I generally do not roll them over, due to their cost and reduced liquidity., unless shares are trading very close to the strike price as expiration nears.

Finally, as it always does, whenever I talk about the possibility of considering a position in Abercrombie and Fitch (ANF), it comes with advisories.

Those shares are ex-dividend this week and even as I still sit on a much more expensive lot of shares, I welcome the dividend and consider testing the waters even further to capture more of that dividend.

The problem is that the dividend is always closely associated with earnings and that’s the case this week, as well.

On a good day, Abercrombie and Fitch stock is prone to price spasms, but all bets are off when earnings are involved. Having already badly trailed the S&P 500 for the year and having fallen by about 25% from its 2016 high, there could be more downside pain, unless they know something that Macy’s doesn’t.

The option market is implying a price move of about 12% next week.

Ordinarily, I would consider the sale of puts if I thought that a 1% or more ROI for that sale could be realized at a strike price below the lower boundary predicted by options traders.

That is the case this week, but because of the dividend, my interest would be in considering a traditional buy/write, but only after earnings and only if shares fall sharply once earnings are announced on the morning before the ex-dividend date.

In that event, I might consider the sale of a deep in the money call, depending on the net premium available, in the event that deep in the money call is exercised by the buyer.

I might even consider looking at an extended weekly option, again being driven by the premium available and the resultant ROI, with or without the dividend capture being part of the calculation.

If it isn’t there may then be an opportunity to get the dividend and an option premium, with some significant downside protection.

That might be the equivalent on both hands giving.

 

Traditional Stocks: Bristol Myers Squibb

Momentum Stocks: none

Double-Dip Dividend: Abercrombie and Fitch (8/31 $0.20), Sinclair Broadcasting ((8/30 $0.18)

Premiums Enhanced by Earnings:  none

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

 

 

Weekend Update – August 21, 2016

We are pretty much done with the most systemically important earnings reports for this most current earnings season.

To say that it has been a confusing mix of results and projections would be an understatement.

By the end of the week, we had our fourth consecutive week of almost no net change. Yet the market remained within easy striking distance of its all time closing highs.

Why it’s at those all time closing highs is another question, but for the past 2 months the climb higher, while confounding, hasn’t disappointed too many people even as it’s given no reason to really be hopeful for more to come.

However, technicians might say that the lack of large moves at these levels is a healthy thing as markets may be creating a sustainable support level. 

That is an expression of hope.

Others may say that the clear lack of clarity gives no signal for committed movement in any direction.

That is an expression of avoidance, so as to preclude disappointment with whatever happens next. If you have no great hopes, you can’t really have great disappointment.

I buy into both of those outlooks, but have had an extraordinarily difficult time in believing that there is anything at immediate hand to use whatever support level is being created as a springboard to even more new highs.

My hope is also tempered by the knowledge that there have been very few instances in which a market has been able to exceed its previous closing highs by more than 2% and while this has been one of those rare times, that “support” level identified by technicians could just as easily be a barrier.

The disappointments of the past 2 weeks that reflect consumer participation in the economy make it hard for me to understand where the justification for a near term interest rate increase will come from.

Ordinarily, I wouldn’t care, except that with the recently strong Employment Situation Report it seemed as if traders were happier with the idea that it was finally time to raise those rates.

What at one time would have been disappointment over the raising of rates has more recently become an expression of hope that higher rates would be a reflection of a growing economy and presumably improved earnings and eventually leading to expanded price multiples.

To hear the stream of Federal Reserve Presidents willing to share their opinions, and there is no shortage of those, you would think that there was plenty of reason to suspect that a rate hike was at hand. The release of the FOMC minutes this week did nothing to dispel that notion either and markets reacted quickly and positively to the suggestions of that increase.

But, then there’s that nagging confusion.

The previous week saw some of the major national retailers start the stream of earnings from that important sector and the initial reaction to uninspiring news and disappointing guidance was hope for better things to come.

How else could you explain the surging prices of those retailers amidst a sea of news that had little of redeeming value?

So often it’s said that “hope is not a strategy,” but as long as axioms are in vogue, traders were “putting their money” where their hopes were and sent those retailers sharply higher.

That wasn’t the case this week.

Well, some of it was the case. Earnings and guidance from retailers was still fairly anemic and guidance was still as disappointing. This time around, however, no one seemed eager to double down and make “lemonade out of lemons.”

It’s hard to fault a sense of caution when disappointment has been at hand, however, I do see the possibility of yet another force at play when we begin to ready ourselves for the next round of earnings.

That starts in October and while there was increased belief that the FOMC would find reason to announce their need for an interest rate increase at the time of their September meeting, I think it will not come at that time.

Instead, the widespread disappointment in retail earnings and the lack of even a shred of optimism leaves us in a position to react to an “under-promise, but over-deliver” scenario that could be the perfect storm of increasing consumer led revenues, profits and stock price.

At least I hope that’s the case.

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

This is yet another week that I have difficulty in identifying anything that captures my interest and more importantly, anything that can capture my money.

For me, 2016 has thus far been a very good year, but most of that has been on paper. It hasn’t been a year of generating consistent option premium revenue, even as dividend revenue has continued playing more of an important role in my thinking.

It has been a year of very little trading and very few newly closed positions that could either be used to build up cash positions or used to fund the opening of other new positions. Not only has my trading been very limited, but it has also been limited to a very narrow range of stocks.

I don’t mind the former, because it requires much less of a thought process when you simply do the same thing over and over and become a serial purchaser of the same stock or serial seller of the same calls or puts.

Ironically, all of the positions that I’m considering this week are reporting earnings and despite the uncertainty that’s always associated with earnings, these may offer a reasonable level of reward for the risk, with a very specific caveat.

In addition to all reporting their quarterly earnings this week, Best Buy (BBY), GameStop (GME) and Hewlett Packard (HPQ) all have other things in common.

For one, they have all been written off as becoming increasingly irrelevant and unable to compete in a changing marketplace.

That may still turn out to be the case for any or all of those names, but they have all gone on to see another day.

Best Buy has been in the news lately as it celebrates its 50th anniversary. The “Black Friday” like prices promised may bring customers into its stores, but it’s probably a question for a future quarter as to whether there is a net positive impact from steep price cutting, especially when comparisons are made.

Even as it’s chief rival Amazon (AMZN) grows and grows, Best Buy continues to have relevance and is no longer purely a brick and mortar showcase for its rival.

I currently have a 16 month old share lot and despite its anemic 7% ROI to date, that still puts it 2% ahead of the S&P 500 for the comparable period.

Disappointing?

Yes, especially if I were more precise and also factored in the S&P 500 dividends for that time period.

But I still have hope, because that 7% return comes as the shares are still about 11% below their purchase price.

Hewlett Packard, has certainly been a disappointment the past few years to just about everyone. I still own shares following the spin-off of its more energetic self, Hewlett Packard Enterprises (HPE).

While Meg Whitman jumped ship and left the commodity based business behind in favor of the spin-off, I saw my shares of the latter assigned as one of those very few 2016 closed positions. But, as anemic as Hewlett Packard has been, the accumulation of premiums and dividends has made mediocrity the new black.

While the technology sector has performed admirably during this earnings period I would be reluctant to bet that the same would necessarily extend to Hewlett Packard, particularly if the market has a stutter step or two this week.

GameStop may be the poster child for a company that has been written off on so many levels and so many times.

Whether it’s the business model that’s called into question, the changing face of gaming or the entry of muscled competitors, GameStop has persisted, much to the disappointment of that short selling community.

Always a favorite of the short selling community, except when it surges on unexpectedly strong earnings, it has neither gone to “zero” nor willingly given up its fight for relevance.

What these three weekly choices also have in common is that all three will be going ex-dividend in the next 2 to 3 weeks.

I generally like to consider earnings related trades in terms of the sale of puts, but am wary of doing so when there isn’t very much time to recover from a larger than expected price decline with an impending ex-dividend date to also consider.

Normally, I would consider rolling over the short puts in the event of that kind of an adverse price movement, but I generally would prefer to have outright ownership of shares with an ex-dividend date rapidly approaching.

The final thing that all three have in common, at least from my perspective, is that I’m not interested in establishing any kind of position other than after earnings and then, only in the event of a reasonably sized decline.

That’s because the options market is not implying the kind of moves that those stocks have made in recent years when earnings have been released.

That is the essence of the caveat.

For me, that means that there is insufficient reward relative to the risk if trying to enter into a position before earnings are announced.

While the opportunity to generate some revenue from the sale of puts may vanish if waiting until after earnings and the earnings surprise to the upside, the  reward could be magnified in the event of a large downside move as volatility driven premiums typically increase and entry price may be considerably lower.

In such an instance, I would probably prefer to buy shares and sell calls. In doing so, I’d be mindful of the upcoming ex-dividend dates and would likely look at the opportunity to sell longer term dated options and rather than utilizing in the money or near the money strike levels, would consider going for some capital gains on the underlying shares that may just need a little time for a price rebound.

Or at least I will hope if in that position to be disappointed.

 

Traditional Stocks:   none

Momentum Stocks:  none

Double-Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (8/23 AM), Hewlett Packard (8/23 PM), GameStop (8/24 PM)

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

Weekend Update – August 14, 2016

When the news came that Thursday’s close brought concurrent record closing highs in the three major stock indexes for the first time since 1999, it seemed pretty clear what the theme of the week’s article should be.

But as I thought about the idea of partying like it was 1999, what became clear to me was I had no idea of why anyone was in a partying kind of mood on Thursday as those records finally fell.

Ostensibly, the market was helped out by the 16% or so climbs experienced by the first of the major national retailers to report their most recent quarterly earnings.

Both Macy’s (M) and Kohls (KSS) surged higher, but there really wasn’t a shred of truly good news.

At least not the kind of news that would make anyone believe that a consumer led economy was beginning to finally wake up.

The market seemed to like the news that Macy’s was going to close 100 of its stores, while overlooking the 3.9% revenue decline in the comparable quarter of 2015.

In the case of Kohls the market completely ignored lowered full year guidance and focused on a better than expected quarter, also overlooking a 2% decline in comparable quarter revenue.

For those looking to some good retail news as validating the belief that the FOMC would have some basis to institute an interest rate increase in 2016, there should have been some disappointment.

That’s especially true when you consider that the last surge higher was in response to the stronger than expected Employment Situation Report in what could only be interpreted as an embrace of economic growth, even if leading to an increased interest rate environment.

With Friday’s Retail Sales Report showing no improvement in consumer participation, you do have to wonder about those signs pointing toward that rate hike.

Of course the official Retail Sales data are backward looking and it’s really only the future that matters, but for that matter, the early retail reports aren’t exactly painting an optimistic picture for whatever remains in 2016.

It can’t be clear to anyone what awaits. Other than repeating the usual refrains such as interest rates can’t get any lower, oil prices can’t get any lower and stocks can’t go any higher, the only thing that is clear is that whatever is anticipated is so often unrealized.

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

I’m not really sure why Dow Chemical (DOW) was punished as the past week came to its close. Of course, I understand that news of institutional buyers lightening their own load of shares can have a direct impact on the supply and demand equation and can also create a sense of needing to get out of the same position by investor lemmings.

I suppose that there may be others looking to escape over the next few days even as there is little to suggest a fundamental reason for heading for the exits.

While I already own 2 lots of its shares, I view the decline of last week as an opportunity to add shares, as the decline may have been simply nothing more than needing to digest some of its recent gains.

Dow Chemical probably has little downside with regard to its complex proposed deal with DuPont (DD) and probably has some upside potential when approval is at hand. In the meantime, however, simply continuing to trade in its recent range, along with its still generous option premiums and dividends, makes Dow Chemical an appealing potential position.

With earnings now out of the way and following a 10% decline, Gilead Sciences (GILD) is again looking attractive.

As with Dow Chemical, institutional investors have been reportedly been net sellers of shares and those shares are now at a 2 year low.

While it might be a serious mistake to believe that those shares couldn’t go any lower, there are some near term inducements to consider a position at this time and to do so without regard to what may be substantive issues for those with a longer term horizon on the company, its products and its shares.

In addition to a nice premium, particularly relative to an overall decreasing volatility environment, there is an upcoming dividend.

That dividend is still a few weeks away, so there could be some consideration to initially establishing a position through the sale of put options.

There is considerable liquidity in that market and if faced with assignment there could be ample opportunity to keep the short put position alive by rolling it over to the following week.

With that upcoming dividend, however some attention may need to be given to the possibility of taking assignment in an effort to then capture the dividend.

Finally, I’m not certain how many times in a lifetime I can consider buying shares of MetLife (MET). It is a stock that I am almost always on the fence about whether the timing is just right.

One of the things about it and some other stocks that really creates a timing problem for me is when earnings and an ex-dividend date are tightly entwined. Putting the two together, sometimes even their sequencing requires some additional thought.

Too much thought is often something that only serves to muddy things and in my case is often the reason that I end up not owning MetLife shares.

I’ve already done enough thinking in my lifetime, so there’s really not much reason to go and look for more opportunities requiring analysis of any kind.

Now, however, with both of those events in the back mirror and with nearly 3 months to go until they become issues again, it may be time to consider those shares once again.

The theory, which is getting really long in the tooth, is that interest rates have to be heading higher. As we all know, however, regardless of how true that may logically have to be, there’s nothing in our past to have prepared us for such a long and sustained period of ultra-low interest rates.

And so MetLife has not followed interest rates higher, because interest rates haven’t gone higher, much to everyone’s continuing surprise.

Not that this past week’s retail results would give anyone reason to believe that the economy really is heating up and that interest rates will follow, you still can’t escape the “sooner or later” school of logic.

I know that I can’t.

At its current level and with some decent downside support, I think that this may be a good point to get back on that rising interest rate bandwagon and use MetLife as the vehicle to prosper from systemically increased costs.

Traditional Stocks:  Dow Chemical, MetLife

Momentum Stocks:  Gilead Sciences

Double-Dip Dividend: none

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.

Weekend Update – August 7, 2016

In the 57 years since “The Day the Music Died,” the S&P 500 has risen about 3800%

What’s not to like about that?

Among those perishing in that February plane crash was “The Big Bopper” whose signature hit song “Chantilly Lace” was telling the world what he liked. 

While it may be cute when a child gives you that kind of information, not much good is to come when an adult lets free with those unfiltered thoughts.

It may be even worse when they act upon those thoughts that no one needed to hear in the first place.

The Big Bopper’s album cover makes the words of the song even more creepy, but there must have been strains of that admittedly catchy tune playing as investors were awaiting last Friday’s Employment Situation Report.

Of course, as we all know, there is nothing creepy at all about being in love with money or letting it know what you especially like about it.

It was pretty obvious what investors wanted and liked when the data was released and seemed to put a nail into the shockingly low number of new jobs reported back in June 2016.

I don’t know what the equivalent is to the obligatory “chantilly lace” in the song, but the market definitely decided it was time to put a pretty face on the impending likelihood of an interest rate increase.

At one time reviled and probably misunderstood, now the market appears to understand that in the current economic context, a small rate increase is reflective of the early stages of an economy getting on its feet after many years of listlessness.

With a torrent of confusing data and false starts over the past couple of years and after 2 months of wildly diverging employment numbers, not only was it difficult to predict what the latest release would hold, especially after another disappointing GDP, but it was also difficult to predict or gauge the market’s reaction.

But now we know what the markets like, at least for now.

What they like heading into a week that begins quarterly earnings reports from national retailers is the sense of certainty about that interest rate increase that had been expected to occur on a serial basis during the course of 2016.

In hindsight, as good as low interest rates have been and as much as most everyone on the equity side of the equation has liked low rates, most recognized that something bad was obscured by the allure of that chantilly lace.

Sooner or later it’s time to grow up and move on and maybe Friday’s market response to another solid month of employment data was an embrace of a more mature outlook on things.

We’ll never know if The Big Bopper would have found a more mature approach in the pursuit of life’s happiness, but it’s not too likely that the market will be on an extended pursuit of logic and rational actions, despite Friday’s constructive embrace.

Of course, as we do await next Friday’s Retail Sales Report, it would be nice to get some confirmation by the retailers themselves, especially in regard to the guidance they are going to provide.

It’s one thing to make that creepy call and divulge your likes, but it’s an altogether different thing when the one on the other end of the line provides validation.

But it’s still hard to imagine how the FOMC goes forward if retail is lagging behind and there’s scant evidence of consumer participation, even as employment is growing strongly.

Next week, aside from those retail earnings and retail sales data, is going to be a quiet week on the economic front. In fact, not a single Federal Reserve Governor is scheduled to reveal what they like and we will all be spared of those inner thoughts.

That’s something that we could all like, as those are among the thoughts that should be kept to one’s self or solely in the company of consenting adults, who may still have to be prepared for what the chantilly lace has been hiding.

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

With the exception of considering adding some iPath S&P 500 VIX Short Term Futures (VXX), as a purely speculative trade, or even longer term holding, this week is one in which I think some quintessentially American brand names can strike gold without having to risk exposure to Zika or street crime.

Among the names that I might like to buy or add to existing positions are Coach (COH), General Motors (GM) and Starbucks (SBUX).

Coach reports earnings this week, as does its competitor for the hearts of investors, the non-dividend paying Michael Kors (KORS). I recently sold calls on a longstanding lot of Coach shares. While they aren’t underwater, they’re much too close to being so after having been treading water for far too long.  

Following the old axiom of “buy high and sell low,” I bought the existing lot at too high of a price and have held it for more than 2 years. At the time of the purchase, the share price was actually the lowest I had ever paid and so it seemed to be a bargain.

Funny thing about bargains.

The only thing that has made it palatable have been the dividends and the other 19 times I’ve owned shares during a 4 year period.

I often like to sell puts before earnings, as Coach does have a history of large moves, often beyond what the option market had predicted or before earnings.

This time around, though, I’m thinking of adding more shares and selling calls beyond September’s ex-dividend date in anticipation of Coach finally breaking beyond its 2 year highs, as long as the broader market plays along.

Starbucks usually recovers nicely after taking an earnings related hit. It tends to do so when Howard Schultz offers a compelling series of reasons why everyone got things wrong.

This time around, he didn’t need to do that as earnings saw neither a strong move lower or higher. It was only on the following week that some analysts expressed ambivalence over near term prospects and Starbucks shares had about a 5% decline.

I wouldn’t necessarily buy a cup of Starbucks coffee if it was offered at a 5% discount, but having wanted to own shares again following a long hiatus, that 5% may be enough of an enticement.

As with Coach, I’m thinking of using a longer dated expiration date for the sale of calls, although not so long as to encompass the next ex-dividend date.

Also along with Coach, while there are continuing currency considerations, as long as the broader market stays at current levels or higher, there isn’t much reason to expect that Starbucks will do anything less than meet the broader market’s performance.

General Motors hasn’t had a particularly good month and guidance provided by  Ford (F) certainly raises into question that need for the consumer to be in the market for new cars. However, General Motor’s performance has still been admirable, given the headwinds.

To a very large degree, that has been the story of the new General Motors under the leadership of Mary Barra.

There has been so much bad news and yet it has been methodically digested and skillfully managed.

That’s not to say that General Motors shareholders haven’t paid a price, even if only in opportunity costs, but share performance would likely have been far worse in any number of earlier time periods.

As with Coach and Starbucks, my focus is on a longer term option expiration when selling calls. In the General Motors case, there’s an attractive dividend to be factored in before the expiration of the September 2016 contract.

Just as with Coach, that dividend has made the holding of my current lot of shares palatable and may provide some justification for considering a new position as a longer term holding, while trying to accumulate dividends, option premiums and some capital gains on the underlying shares.

Finally, just when I thought volatility couldn’t possibly get any lower, I recalled some similar lines of thought regarding energy prices.

When you’re on the wrong side of the expectation that prices really can’t get any lower you also come to the realization that there really is nothing funny about “bargain prices” that turn out not to be bargains, at all.

One of the things that I like about this product, despite the fact that it is definitely not designed for longer term holding, is that it is very easily traded in the options market and offers many opportunities, even if you’re wrong about its near term direction or magnitude.

At the current level, the premiums for selling covered calls or put options is really enticing and I’m thinking of doing so, but am undecided about thinking about a short term trade or betting that in the longer term there will be some sort of a market correction.

In that case, the sale of a longer term dated, in the money put option, could be a very lucrative trade and serve as some portfolio protection, as well.

The latter has been the predominant way in which I’ve used this product over the past few years, but haven’t exactly shunned the opportunity to generate short term option income, as well.

A number if weeks ago there was a disconnect between the typical relationship between volatility and the S&P 500, in that volatility fell, even as the broader market did, as well.

To many, and in this case, they were correct, that was a harbinger of continued deterioration of the volatility index as  markets would be poised to head higher.

I can’t begin to understand the mechanism, but sometimes pure observation is a great tool if you pull the chantilly lace from in front of your eyes and take a glimpse at the ugliness of the reality straight ahead.

 

Traditional Stocks: General Motors, Starbucks

Momentum Stocks:  iPath S&P 500 VIX Short Term ETN

Double-Dip Dividend: none

Premiums Enhanced by Earnings:  Coach (8/9 AM)

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

Weekend Update – July 31, 2016

Let me get this straight.

The people sequestered in their nearly meeting for 2 days in Washington and who only have to consider monetary policy in the context of a dual mandate are the smartest guys in the room?

We often hear the phrase “the smartest guys in the room.”

Sometimes it’s meant as a compliment and sometimes there may be a bit of sarcasm attached to its use.

I don’t know if anyone can sincerely have any doubt about the quality of the intellect around the table at which members of the FOMC convene to make and implement policy.

While there may be some subjective baggage that each carries to the table, the frequent reference to its decisions being “data drive” would have you believe that the best and brightest minds would be objectively assessing the stream of data and projecting their meaning in concert with one another.

One of the hallmarks of being among the smartest in the room is that you can see, or at least are expected to see what the future is more likely to hold than can the person in the next room. After all, whether you’re the smartest in the room and happen to be at Goldman Sachs (GS) or at the Federal Reserve, no one is paying you to predict the past.

If you’re a Goldman Sachs shareholder and you’re using its share price as a measure, you may have been wondering if the smarts left the room sometime in 2013, albeit coming back for an occasional visit to slum with old friends.

I went to high school with their previous CFO. I can tell you that he was a pretty smart guy among a school of very smart guys. While I was proud of my standardized test scores and they opened up doors, they were absolutely mediocre within the context of the entire graduating class.

From the date he left Goldman Sachs in January 2013, those shares have trailed the S&P 500 by 10%.

You might also be wondering about the Federal Reserve and the smaller subset of its members comprising the FOMC.

When an interest rate increase was announced in December 2016, there were more than subtle hints that 2016 would herald a series of small interest rate increases.

Why would anyone do that?

Clearly, the smartest guys in the room had to believe that the economy was showing signs of growth in the year ahead that would warrant those increases. Mere mortals may not have seen those signs nor had the confidence to proceed and effect policy change.

In the meantime. 2016 has had nothing but mixed signals coming from the economy and even more muddled signals coming from individual members of the FOMC.

As individuals it may be difficult to lay aside some of the biases that pepper interpretation of data, but once in the room and at the table, the smartest should be able to set aside subjectivity.

So it may be even more disappointing that as last Friday’s GDP data was released, there wasn’t much in the way of news to suggest that the economy was warranting even consideration of an interest rate increase, much less an actual increase.

On the day before the GDP was released, the betting was that there was nearly a 50% chance of seeing an interest rate hike in by December 2016.

Now, even with lots more data to come over the course of the next 5 months, that certainty is sure to decrease, just as market volatility and uncertainty decreases in tandem.

What may be clear is that the designation of being the “smartest in the room,” may be no different from what we see in most every stock chart.

Prices wax and wane and perhaps so does the ability to live up to the “smartest” designation.

Or maybe the smartest guy had also left the room, just as may have been the case at Goldman Sachs.

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

As I look around at all of the issues of the day and the sort of things that can and have moved the stock market lately, Sinclair Broadcasting (SBGI), which reports earnings this week, doesn’t share too many of the risks faced by so many.

Unless of course you put lots of faith into charts, in which case everything has been telling you to sell, sell, sell.

Whether its the Bollinger Band, the MACD Signal or the 50 and 200 day moving averages, I think that the proverbial horse has left the gait and shares happen to be at a price that has served me well in the past.

Sinclair Broadcasting, even as we think less and less of terrestrial broadcasting is a growing behemoth, that like its print brethren is probably not going to really be disappearing anytime soon.

Unlike most earnings related trades, I don’t think that I’m interested in pursuing this one through the sale of puts. There isn’t enough liquidity and as a result the bid- ask spreads are just too great to be able to reliably roll these over to avoid assignment.

In addition, sometime in the September 2016 option cycle there is an ex-dividend date, so I would be inclined to either do a buy/write before earnings with a September 2016 expiration or, if concerned about earnings, wait until after their announcement.

In that case, if shares do sink lower, I would then consider selling out of the money current month puts and would take share assignment, if necessary, rather than attempting to roll the puts over. Then, if possible, I would attempt to sell calls on the newly assigned shares in the hopes of securing the dividend, the option premium and perhaps some capital gains on the shares, as well.

PayPal (PYPL) on the other hand, does face some of the challenges that many others do. Currency exchange rates and consumer lethargy are in the equation and despite slightly increased guidance, shares didn’t too terribly well after recently reporting earnings.

Unlike Sinclair Broadcasting, though, PayPal options have nice liquidity and offer extended weekly expirations.

With no dividend to complicate the decision, this is a position that could easily lend itself to consideration of the sale of put options. At its current price, I could envision PayPal as being a potential opportunity for serial rollover or serial sale of puts, even as the share price may increase and existing short put positions expire.

Hewlett Packard (HPQ) seems about as unexciting as anything, except for perhaps Yahoo (YHOO). Sometimes the mighty fall and sometimes their offspring get far more attention than the staid parent that seems to be going nowhere.

I rolled over some Hewlett Packard options last week and have watched as the Hewlett Packard Enterprise (HPE) spin off has continued to perform very well.

I lost those shares to assignment, but their combination, during their respective holding periods had been very good and I think that Hewlett Packard, which reports earnings near the end of the August 2016 has potential to generate some respectable returns, as well.

While my initial interest would be in the sale of weekly call options, if in a position to later consider rolling over, I would keep my eye on the upcoming earnings and then the ex-dividend date a few weeks later.

In so doing, Hewlett Packard could easily become a longer term holding and ideally one that could generate some additional periodic income by virtue of the sale of call options along the way.

Finally. MetLife (MET) is ex-dividend this week and the thesis that it stands to benefit in the early stages of a rising interest rate environment has been waiting a long time for that environment to manifest itself.

Besides that problem, shares are at a near term high having recovered from a nearly 11% one day drop after the “Brexit” vote and Janus’ Bill Gross opining that insurers, banks and pension funds were “slowly going bankrupt.”

I don’t particularly like to go after stocks after that kind of a recovery, but I think that there may be more ahead. Of course, the other problem is that the day before the ex-dividend date, MetLife will report earnings, so to get this dividend you may really have to earn your money.

The option market is expecting only a 3.7% move in either direction, so the option premiums are not that bloated as earnings do approach, but there shouldn’t be too much reason to suspect that MetLife will take a different course from others in the financial sector that have already reported.

Since there is an ex-dividend date, rather than selling puts to take advantage of an earnings related opportunity, I would execute a buy/write using an at the money strike weekly or extended weekly or a slightly out of the money August 2016 expiration date.

In any of those cases an early assignment in the event of an earnings related price surge would result in a very nice 3 day ROI, even if ceding the dividend to the option buyer.

I like those kind of scenarios, especially if there some other identifiable target to re-invest the proceeds of the early assignment

Traditional Stocks: Hewlett Packard

Momentum Stocks: PayPal

Double-Dip Dividend: MetLife (8/4 $0.40)

Premiums Enhanced by Earnings: Sinclair Broadcasting (8/3 AM)

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

Weekend Update – July 24, 2016

“When you’re a hammer, everything looks like a nail.”

That old saying has some truth to it.

Maybe a lot of truth.

When you think about stocks all day long everything seems to be some sort of an indicator as I look for a rational explanation to what is often a prelude to an irrational outcome.

Reducing the intricate character of what is found in nature to a mathematical sequence is both uplifting and deflating.

When the very thought of uplifting and deflating conjures up an image of a stock chart it may be time to re-evaluate things.

When you start seeing the beauty in nature as a series of peaks and troughs and start thinking about Fibonacci Retracements, it is definitely time to step back.

Sometimes stepping back is the healthy thing to do, but as the market has been climbing it’s most recent mountain that has repeatedly taken the S&P 500 to new closing highs, it hasn’t taken very many breaks in its ascent.

You don’t have to be a technician, nor a mountain climber to know that every now and then you have to regroup and re-energize.

You also don’t have to be a mountain climber to know that standing on the edge of a cliff is fraught with danger, just as each step higher adds to risk, unless there’s a place to rest.

Some mountains may not even be meant to be climbed except by the very best of the best.

I’m certainly very, very far from that, but even if I was not, I would still be very, very leery.

For all of the fears that surfaced after the “Brexit” vote and all of the speculation regarding its impact on earnings guidance, those fears have been quickly dismissed and the guidance delivered, thus far, has ignored the conventional wisdom.

Whether JP Morgan (JPM) or eBay (EBAY), among those that were on the top of the Brexit hit list, there has been nary a mention of the impact of divorce on their future earnings and the broader market has taken note, as have investors in those individual stocks.

And so, as earnings have been coming in, and as they accelerate in the coming week, the mountain continues to be scaled as no one really knows where the peak happens to be.

As that peak gets higher and higher, it probably draws in two kinds of people.

The best of the best generally got that way because they are nimble in their trading and may recognize a breakout in the making when they see one.

The other kind that gets in are the ones afraid of missing out or are of the belief that what’s going on will keep on going and maybe they can finally make up for their lost opportunities over the past 7 years.

For my part, I’m going to remain circumspect and have done very, very little trading, other than rolling over positions and the occasional opening of a new position or two in any given week.

I don’t anticipate that changing too much this week as the S&P 500 has now climbed nearly 9% after its Brexit low of less than a month ago.

That’s a little too steep for me and it has been almost a straight line higher.

Being nearly fully invested, although preferring to have more cash, I’m happy to go passively along for the ride, but am not terribly interested in adding to my commitment.

Sometimes it really is better to be safe than sorry about missing out.

While a fall from a top a mountain may be a terminal event, there’s always another opportunity after a fall from a market peak and I would rather wait for that opportunity.

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

Although I my be of a mind to not commit any cash this week, I’ve been of that mind before and it is sometimes difficult to resist a trade.

For me, with a frequent focus on trades that include a short position on weekly options, the character of the market as the week begins is often the invitation to participate or the closing of the door.

I’m unlikely to ignore my reticence to participate if the market continues its climb on Monday morning. However, if there is some weakness, especially if there is some real pronounced weakness, I may change my mind.

With earnings season really getting into full gear this week, earnings or impending earnings has to be part of any equation that has a short term time frame.

Macy’s (M), which was battered following its last earnings report and is a company in transition and likely facing greater transition in the near future, doesn’t report earnings until August 11, 2016.

While earnings met the whisper numbers last quarter, revenues were down. More ominously, though, Macy’s revised its yearly guidance significantly lower at that time.

My expectation is for an “under promise and over deliver” scenario in a few weeks, but my focus is in the coming week.

I think that the downside risk is low, unless the broader market is hit with a substantive decline. For the risk, there is ample reward and Macy’s is also an imminently liquid options position, if faced with the need to rollover the short call position.

I wouldn’t mind that opportunity and with an optimistic outlook for its shares as earnings are around the corner, I’d been inclined, if faced with an option expiration, to take advantage of the earnings enhanced premiums to consider a longer time frame rollover and increasing the strike price at that time.

With the Brazil Summer Olympics ready to begin, I still think about the controversy during the last Olympics regarding Under Armour’s (UA) swimsuits, which many blamed for the poor performances by United States swimmers.

CEO Kevin Plank handled the controversy as well as any CEO could ever have done and the story disappeared from the headlines faster than anyone could have predicted.

Under Armour does lots of things very well in a very competitive industry, but what it hasn’t done well in the past 3 months, following its last earnings report, has been to keep pace with the S&P 500.

That’s a little ironic for a company that has been a pace leader and that has been unaccustomed to falling behind.

Under Armour, unlike Macy’s, increased its annual guidance last quarter, so there is always that opportunity for disappointment, but Kevin Plank likely knows his business well enough to not stick his neck out too far, nor to sully his own reputation and credibility.

In the meantime, the option market is implying an 8.1% price move next week. There isn’t too much enhancement to the option premium that you can derive by selling out of the money puts, as you can potentially receive a 1% ROI, but at a strike price that is only 9.3% lower.

That’s not too much of a cushion, but Under Armour shares are ones that I wouldn’t mind owning heading into the Olympics, particularly if there is a ban on some athletes from Russia.

Fastenal (FAST) just reported earnings and just had its ex-dividend date, so there’s nothing terribly exciting on the horizon.

Then again, there’s never anything terribly exciting about Fastenal.

It just reported a miss on earnings and shares have lagged the S&P 500 by almost 9% since then.

That decline left shares at a price below the mid-point of the high and low of 2016.

If you believe that there is some chance of a pick up in the kind of economic activity that’s usually among the first to improve after people go back to work, then Fastenal may be a good place to park some money.

Blackstone Group (BX) just reported its earnings and they came in at the mid-point between consensus and whisper, although on a decline on top line revenues.

So how do investors respond?

In the 2 days remaining on the week following the earnings announcement, Blackstone shares climbed almost 5%, while the S&P 500 fell 0.2%

Normally, I wouldn’t have too much interest in considering a stock that had just gone up 5% on non-exceptional news, but those shares are ex-dividend this week and even after a dividend reduction, the yield is very attractive, as is the option premium.

One consideration that I have for this stock is to sell in the money calls with an expiration date the following week.

By example, using Friday’s closing bid – ask prices, if purchasing shares at $27.42 and selling August 5, 2016 $27 calls, you would receive a $0.64 premium.

With the ex-dividend date on July 28, 2016, if shares close the previous evening above $27.36, there is a chance of early assignment. The deeper in the money at that time, the greater is the likelihood of assignment.

If assigned, the 3 day ROI would be 0.8% and the opportunity to then re-invest the assignment proceeds.

On the other hand, if those shares are assigned the following week and you get to retain the dividend, your 2 week ROI would be 2.1%

To put that into some relative context as provided by Eddy Elfenbein, the market has only risen 2% or more on 3 occasions after hitting a record closing high.

If you don’t follow Eddy Elfenbein on Twitter, you should consider it more than any of this week’s selections. He is the funniest, most gracious and offers the best factual information that can be found on Twitter.

Finally, it’s only appropriate to consider an earnings related gamble with Las Vegas Sands (LVS).

For a number of years, Las Vegas Sands was a stock that I had some really good fortune with in buying shares and then selling calls and then doing it over and over again as shares were assigned and subsequently the share price fell, putting it back into my portfolio.

That seems like an eternity ago, as I still sit on two very expensive lots of shares that are both uncovered.

The only saving grace has been the generous dividend, which would likely continue to be safe as long as Sheldon Adelson, the Chairman and CEO is in charge and has a vested interest in the dividend.

Did I mention that Adelson was also the Treasurer?

The option market is implying a 6.2% price move next week. That seems a little low to me, but what I find appealing is that even with a 9.3% decline in share price, it can be possible to generate a 1% ROI by selling out of the money puts.

With the next ex-dividend nearly 2 months away, this might be a position that I would welcome an opportunity to rollover in the event of an adverse price move this week.

Somewhere deep down, I’m of the belief that the peak of the bad news coming from its operations in Macau are about to be reached and expect to hear some hint of that as guidance is provided.

I’m also prepared, however, to fall off the cliff, but still live another day in that event.

 

Traditional Stocks:  Fastenal, Macy’s

Momentum Stocks:  none

Double-Dip Dividend: Blackstone Group (7/28 $0.36)

Premiums Enhanced by Earnings:  Las Vegas Sands (7/25 AM), Under Armour (7/26 AM)

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

Weekend Update – July 17, 2016

 

Stock market investing is all about risk and reward and sometimes you do have to stick your neck out.

There is no reward without risk.

It’s sort of like those who say that you will never understand happiness without having experienced sadness.

My preference, however, it to simply experience varying levels of happiness and to ignore anything that might detract anything from the lowest level of happiness.

I ignore lots of things, much to the consternation of those around me.

But I ignore that consternation.

The same thing isn’t really possible with investing as not only is happiness so often of a very temporary nature and fleeting, the only way to avoid risk right now is to look at bonds or your mattress and those carry lots of opportunity risk.

Also, there’s a big difference between the qualitative feel of personal happiness and the quantitative nature of investing.

In other words, instead of being a giraffe, you would have to be an ostrich, although the ostrich is actually doing something of value when their head is below ground.

So you do have to stick your neck out if your happiness is defined in the form of stock gains.

I wasn’t very happy in 2015, but am very happy with 2016, to date.

Much of that has to do with the fact that the very stocks that disappointed me in 2015 are the ones delighting in 2016, even as they still have lots to do to erase the stink of 2015.

Sitting on some substantial year to date gains comes as the market has not only hit its all time high, for the first time in over a year, but did so again and again.

The post-Brexit turnaround has been stunning.

From the lows following the swift decline after the Brexit vote was confirmed, the S&P 500 has climbed 8%. For its part, the DJIA had climbed nearly 1400 points.

All of that has come in just 13 trading sessions and there have been scant few breathers during the ascent.

That makes some technicians nervous, as they like to see those breathers establish support levels. Other technicians see the unimpeded climb higher as conformation of a breakout whose limits can’t be quantified other than in hindsight.

People like to talk about periods of risk on and risk off and if you’re sitting on cash at the moment, you are certainly faced with a question of whether to take on risk in trying to deal with your fear of missing out on the party.

With more cash being freed up in my account this past week than has been the case since 2015, I would have been ecstatic had that been the case had markets not just climbed 8%.

The challenge is what to do with that money that won’t make you feel like an idiot because of your action or like a moron because of your inaction.

With earnings season having just started in earnest during the latter half of last week, there wasn’t the kind of very guarded Brexit related guidance that I was expecting from JP Morgan (JPM) and that I thought could set the tone to bring an end to the market’s march higher.

Nor did any of the 13 speaking appearances by members of the Federal Reserve shake anyone’s confidence.

It only made sense that as very few were expecting anything good, that the market should take the occasion to move decidedly higher.

However, now as more are beginning to believe that there’s still time to get on board, I’m feeling more reluctant to stick my neck out and don’t mind the thought of burying my head in a pile of cash.

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

I don’t think there’s very much appealing about Potash Corporation of Saskatchewan (POT), other than perhaps its name being fun to say. Potash is one of those stocks that I swore that I would never buy again, as most stocks that I’ve sold for a loss are forever dead to me.

But that was almost 4 years ago and it now seems like an eternity has come and gone as Potash shares are at multi-year lows.

What I do find appealing, however, is that those shares seem to have settled in at a fairly stable price range while still offering an attractive option premium.

With earnings coming up the following week, I think that if considering opening a position, now that the ex-dividend date has recently passed, I would do so through the sale of put options.

While the premium is attractive enough to use an out of the money or near the money strike price on a weekly option contract, if faced with possible assignment of shares, I would very strongly consider rolling those puts out by a few weeks or perhaps into the monthly cycle.

At the current price, I think that much of the risk has been removed, although I might have some concern about the safety of its dividend.

What I look at with Potash, is the possibility of it being a vehicle for serial purchase or rollover, while awaiting a move to the upside.

If looking for an example of a breakout, look no further than Seagate Technology (STX). It did so last week while offering some improved guidance, but probably more importantly announcing some very large reductions in its work force.

Ultimately, I will never understand how that can be good news, but for a day here or a day there, the market looks at that kind of cost cutting as good news, even as it may portend some ominous news in the future.

However, I think that the move higher in those shares is simply the long overdue correction to some unduly large declines the previous quarter following revised downward guidance and then disappointing earnings.

While I like to see support levels established to punctuate climbs higher, with Seagate Technology getting ready to report earnings in a couple of weeks, my anticipation is that there will be further upside surprise, just as in the previous quarter there was further downside surprise.

While I would likely consider starting a position with the sale of puts, if faced with assignment, I would accept the assignment rather than rolling over those puts, as there will also be an upcoming ex-dividend date.

AS with Potash, but even more so, the safety of that dividend has to be in question. I had been of the belief that a dividend decrease had been discounted to a degree, but with the recent price surge, I think that now leaves more room to fall in the event of bad news.

If assigned shares, I would look to sell longer dated out of the money calls in an effort to take advantage of the earnings enhanced premium and the possibility of retaining the dividend, while also retaining some opportunity for price appreciation.

Starbucks (SBUX) hasn’t gotten too much attention in the past couple of weeks as it has trailed the S&P 500 in the days after the recovery from Brexit worries.

It really hasn’t recovered from its last earning’s related decline, which is fairly unusual, as it has traditionally done so quite quickly after any strong downward movement, as its CEO, Howard Schultz has typically been able to convince the world that any such declines were entirely unwarranted.

I generally consider the sale of puts in advance or after earnings, but I believe that this time around I would entertain a standard buy/write trade and with an upcoming ex-dividend date, would likely use a longer term call option.

Doing so, such as using the August 2016 monthly expiration, would offer a larger option premium, some time to ride out any price decline and a greater opportunity to capture the dividend.

Even with a decline in shares after earnings are released, there is some reasonable support at a level that could easily be  staging ground for writing new call options if the monthly options expire and there is a desire to generate additional income while waiting for price recovery.

Finally, while reading about it may get old, reveling in it never does.

Once again, this week, I’m thinking about another position in Marathon Oil(MRO).

While I already have a short call position expiring this week and just had a short put position expire last week, I don’t mind the prospect of mindless repetition.

One thing that I did do with that open short call position is something that I had done frequently at one time, but not very often in the past few years.

That is to have rolled over the short call position even when it was highly likely that the position was going to be assigned.

There is something nice about having sufficient volatility in a position to generate large premiums, but to be of a mind that the downside risk is limited or might be short lived.

That has definitely characterized Marathon Oil of late and I decided to roll over the short call position, at a point when even a 2.5% decline would still allow assignment, in return for an additional 1.3% premium.

That risk-reward proposition seemed safe enough to stick my neck out and to give up some of the security of cash.

With any decline in oil on Monday and presumably with Marathon Oil, as well, I would like to consider once again selling short put options. 

The risk, however, is that in the event of an adverse price move and the subsequent need to roll over the position, you run closer to the additional risk associated with earnings, which occur the following week.

In that event I would choose an expiration date to bypass earnings, but would also be mindful of an upcoming ex-dividend at the end of the August 2016 option cycle.

From my perspective, being short put options on the ex-dividend date is an unwarranted ceding of reward while taking on additional risk.

 

Traditional Stocks:  none

Momentum Stocks:  Marathon Oil, Potash, Seagate Technology

Double-Dip Dividend:  none

Premiums Enhanced by Earnings:  Starbucks (7/21 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.

Weekend Update – July 13, 2016

 I still have a fascination with license plates and the bumper stickers put on their cars.

The license plate thing these days is more geared toward trying to decipher the message contained on someone’s vanity plates.

That often takes a combination of having a very open mind as to the intended grouping of letters and numbers and to the message.

Of course, the exercise isn’t complete until then driving past the car driver and either giving them a thumbs up or a shoulder shrug.

The bumper sticker thing is more just a question of reading and then trying to imagine what the person in the car will look like once going past them.

For example, in my experience, those with the "Choose Civility" bumper sticker tend to be very rude drivers, but they don’t look rude.

What both fascinations have in common is that as I get older, the distance that I need to get within range to be able to read the plates and the bumper stickers is increasingly getting smaller and smaller.

That brings some danger, but sometimes it’s really hard to resist.

When I say "sometimes," I mean that I can never resist and it is the reason that my wife won’t let me drive when we’re together.

I need to be within range.

But basically, when it comes to those fascinations, as my eyesight may be withering with age, i seem to be willing to take on more risk to be within range in satisfying those fascinations, even as there’s little in the way of reward.

As we are getting closer and closer to the next FOMC meeting, this past Friday’s unexpectedly strong Employment Situation Report brought us closer and closer to an all time high on the S&P 500.

The coming week has an unprecedented 13 appearances by members of the Federal Reserve and we could get some insights into what various positions will be at the FOMC’s upcoming meeting.

When Monday’s opening bell rings we will be within easy range of both the closing high and the intraday high and that may be when the danger begins.

The danger is either missing out on a market that catapults beyond its previous resistance or getting sucked in a an investor afraid of missing out on the catapulting that fails to materialize.

Getting within range, however, often also gets you closer to headwinds that conspire to ensure you keep your distance. As we are preparing to bound past the upper boundary established by the S&P 500, this week also brings the start of another earnings season.

What may make the headwinds a bit more strong than usual, despite being against a backdrop of an increased possibility of the FOMC deciding to go forward and raise interest rates, is the recent vote by Great Britain to leave the European Union.

Why that may matter is that many are expecting that companies will begin to factor the unknown that awaits them in their international businesses into the guidance and no one expects anything but dour guidance.

With JP Morgan (JPM) announcing earnings this coming week and with major operations in London, the risk is clear.

While s strong showing from the financial sector during quarterly earnings reports doesn’t necessarily translate into across the board strength in other sectors or in the market itself advancing, weakness in the financial sector rarely translates into an advancing market as earnings season unfolds.

We are within reach, but it’s not so easy to see what is actually ahead.

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

I tend to be repetitive, but sometimes there’s some value in doing so.

As a teaching tool, repetition can reinforce a lesson.

As a social or business tool, repeating a person’s name, such as to a telephone support member can create an affinity and familiarity and friends do help friends, after all.

One kind of repetition that I really, really like, is the ability to serially buy shares of a stock or to serially rollover the short calls or puts on the stock.

This week, it’s Marathon Oil (MRO) again.

I have nothing of substance to add about the company itself. My focus is entirely on the enhanced premiums it continues to offer as the price of oil bounces between $45 and $50 on a very regular basis.

While doing so, I’ve now owned Marathon Oil shares on 5 occasions in the past 100 days, for a cumulative 65 days of holding.

What that means is that in between holding periods, there is an opportunity to take recycled cash that is derived from  assignments and invest in some other premium generating position.

What I’ve especially liked about Marathon Oil is that the premium is so enriched that it can even be worthwhile to roll the short call position over if faced with assignment.

With earnings in just a few weeks, I may consider entering a position this time through the sale of puts, however. In the event that the position is in jeopardy of being exercised, I would prefer to roll the puts over.

However, if still short those puts heading into the week of earnings, I would probably look at rolling them over to an extended weekly expiration date to have a little more time for price recovery, while still enjoying some enhanced premium.

If still short those puts and approaching the ex-dividend date which will likely be later in August 2016, I would then prefer to take ownership of those shares, even as the dividend yield is only about 1.3%

While no one likes to hear grinding noises emanating from their computer’s hard drive, Seagate Technology has been grinding higher after a brutal decline following lowered guidance that continued after earnings were released.

I took the occasion of the large guidance led decline to enter a position in the erroneous assumption that the shares would be relatively immune to the same bad news.

It turns out that double jeopardy is possible with stocks, even as our personal freedoms are not put to such risk.

While earnings are approaching, I think that the near term disappointment may be over and I’m ready to consider another Seagate Technology position, again through the sale of out of the money put options.

Unlike Marathon Oil, if still in a position to be short those puts as the week of earnings approaches, I would not try to roll them over using an extended option expiration date, as the ex-dividend date is expected to be the following week.

The real wild card is whether Seagate Technology can continue paying that very rich dividend if earnings come in disappointing again.

Currently, it can’t afford to do so, but the question at hand may be just how much that had already been discounted and perhaps played a role in the price plunge of the previous quarter.

Best Buy (BBY) has neither an upcoming ex-dividend date, nor upcoming earnings.

What it has is to have found some reasonable price stability as it currently sits approximately mid-way between its 2016 high and low.

In doing so, it has been fairly impressive in that there hasn’t been terribly much to drive consumers into stores for a "must have" product that hasn’t materialized this year.

Best Buy reported better than expected earnings last quarter and I expect that it will do so again, but there is nearly 6 weeks to go until earnings and I like not being within range of those earnings at the moment, as the premiums are reflecting volatility, even as that volatility may have no real basis.

Among the nice things about Best Buy, if participating with call or put options is that there is some reasonable liquidity. That makes it much easier to be nimble and manage positions if faced with the need to rollover calls or puts.

Finally, I really like Fastenal (FAST).

To me, it represents the American economy as well as anything. It is a place for individuals and other businesses to express their confidence in going forward with various infrastructure projects and the business is fairly immune to world events.

In fact, the strong US Dollar may give it particular cost benefit these days as its supply costs may decrease.

Fastenal stands to benefit as employment increases and as average wages increase.

As it is less likely than many to complain about the impact of "Brexit" on its upcoming sales and profits, it does report earnings this week.

Fastenal has been a notoriously volatile stock when earnings are at hand. Those shares are currently sitting at about the mid-way point between the 2016 low and high.

Fastenal only offers monthly options and this happens to be the final week of the July 2016 option cycle.

The options market is implying that the price move in the coming week may be approximately 4.4%. My expectation, however, is that the range could be as big as 9%, however, I have no idea in which direction those shares might go.

My expectation is that the direction may be higher and as opposed to typically selling an out of the money put contract, in this case I would either consider selling an at the money put or executing a buy/write with a July 2016 expiration on either of those strategies.

Part of the equation is that Fastenal will also be ex-dividend sometime early in the August 2016 cycle and if faced with assignment of shares in the event of having sold puts, I would rather accept the shares than attempt to rollover the puts.

In the event of a higher price move and having elected to execute the buy/write, I might consider the opportunity to rollover the calls, even if faced with assignment to the August 2016 option, simply in an effort to milk some additional premium from the position, in the anticipation of an early exercise by the option buyer in an effort to capture the dividend.

My current open lot of Fastenal is almost 18 months old.

Prior to 2015 I would have scoffed at its 14.7% ROI to date for such a long holding period, but compared to the 5.2% return of the S&P 500, not including dividends, I’m not scoffing.

My expectation is that an additional lot of Fastenal may again wind up being a longer term holding, but as long as those dividends and premiums accrue, even if shares are relatively stagnant, the return can be better than the alternatives.

 

Traditional Stocks:  none

Momentum Stocks:  Best Buy, Marathon Oil, Seagate Technology

Double-Dip Dividend: none

Premiums Enhanced by Earnings: Fastenal (7/12 AM)

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

 

Weekend Update – July 3, 2016

We often have an odd way of accepting someone’s decision to change their mind.

A change of mind is frequently thought to be a sign of a poorly conceived conviction or a poorly conceived initial position.

Few politicians change their minds because they know that they will be assailed for weakness or for having caved in, as opposed to having given careful and objective thought to a complex topic.

Of course, then there’s also the issue of a politician changing their mind simply for political expediency or political advantage.

That kind of distasteful behavior, although perhaps pragmatic, just stokes our cynicism.

We sometimes get upset at a child’s frequent changes of mind and want to instill some consistency that ultimately stifles ongoing thought and assessment.

At the same time, as parents, we are often faced with alternating opinions as to whether we need to be consistent in application and formulation of the rules we set or whether there should be some ability to make the rules a living entity that is responsive to events and circumstances.

When I was a child, I attended a “Yeshiva,” which is a Jewish version of a parochial school. We were taught to abide by Biblical laws, include the law regarding Kosher foods.

One day, when I was about 10 years old, I found a package of ham in our refrigerator and confronted my mother about the blatant violation of a sacred rule.

Her response was, and I remember it some 50 years later, was “if it tastes good, it’s Kosher.”

Okay, then. There are rules and there are rules that can be changed.

Of course, we completely abhor it when someone changes their mind and moves away from a position that we hold near and dear, while at the same time rejoicing when someone changes an opinion to come over to our side.

Just a few weeks ago Janet Yellen was roundly criticized for changing her tone, as many asked what could possibly have happened in the economy in the intervening weeks to have caused a tangible shift in sentiment and more importantly, policy.

Yet, when it comes to the stock market, we accept incredibly rapid and seismic shifts on a regular basis, as if there had been tangible and readily identifiable reasons for those frequent 180 degree reversals.

Many seeking on air time express their changes of opinion without ever acknowledging their previous opinion. In those cases it’s not really a change unless the viewer remembers the preceding opinion, as the interviewer is rarely going to embarrass a guest or regular contributor.

In hindsight, it is sometimes easy to offer a rationale for sudden changes in direction. However, believing the rationale or believing the claim of identifying the variable at play, may be as delusional as offering the opinion.

The one thing that won’t change is that those hindsight and revisionist pats on the back will never change.

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

A month ago I wrote about one of the available investment tools that tracks “volatility.” When discussing the potential use of iPath S&P 500 VIX Short Term Futures ETN (VXX), it was in the context of the then upcoming FOMC announcement.

As the short term trade as which it was intended, that timing was fortuitous. However, if held onto or rolled over in an effort to milk even more of the rich premium, it would not have been very fortuitous as that trade really did end along with the FOMC announcement.

The reversal of volatility was a reflection of the suddenness with which change comes to investor sentiment.

The performance of the Volatility Index at the end of last week and the every beginning of this week had lots of people confused as the typically expected association between a declining market and an increasing measure of volatility broke down, especially during those periods that large declines were reduced heading into the close.

When that does happen and it happens infrequently, it is very often a sign of a real reversal ahead and that is certainly what we saw as the market completely changed its mind when the opening bell rang on Tuesday.

With volatility again at 2 year lows, there can be reason to believe that we are at an inflection point as the market may attempt to test its handful of resistance levels below its all time closing high.

But that inflection point can also bring a move in the opposite direction, as those points are a perfect place to teeter and either catapult or plunge.

With good liquidity and an always provocative premium, even an adverse movement can be played by rolling over to a longer term expiration. I almost always prefer initiating a position through the sale of put options.

Another potential opportunity could have come heading into the “Brexit” vote, but both the outcome of the vote and the response to the result were so unpredictable, that I didn’t consider its use at that time.

But that’s ancient history by now and more predictable opportunity may again be here.

With earnings season ready to begin just a week from now, the equation must again be mindful of the kind of havoc or opportunity that can be created when a penny here or a penny there comes as a surprise.

The real surprises ahead may be related to forward guidance, as we can begin expecting lots of companies to begin moaning about the potential impact of the “Brexit” vote and currency exchange hardships.

At a time when very few companies have been winning fans over on the basis of their earnings the next few months can be especially challenging and I’m wary of selecting positions with a short term mindset if that short term crosses the date of earnings reporting.

In the case of MetLife (MET) that means almost a month before the risk of earnings is added to the continuing risk associated with plummeting interest rates.

If you could somehow go back in time to when the FOMC announced a small interest rate increase in December 2016, you would probably have a really hard time finding anyone who would have believed that 6 months later we would not have had another or even two increases and that the 10 Year Treasury would be offering a 1.46% yield.

What you would have found, as those yields went lower and lower, was that even the relative hawks within the Federal Reserve were squawking less and less as they changed their minds about where the future was going to take the US economy.

While General Electric (GE) recently lost its “Systemically Important” label and shackles by virtue of shedding significant financial assets, MetLife did it the old fashioned way.

They litigated in order to prevent such a designation and won in its battle.

It’s hard, however, to make a case that MetLife shares were rewarded in any way relative to their peers or the S&P 500 since having won that battle.

It’s that under-performance and that enhanced premium that have me interested in adding shares.

With earnings scheduled for August 3, 2016 and an as of yet unannounced ex-dividend date. Traditionally, the ex-dividend date is the same or following day of earnings, except for the 2nd Quarter report. There has typically been a one week lag when 2nd Quarter earnings are announced.

In this case, if a purchase of MetLife shares is warranted, I would consider the sale of a longer term call option, such as the August 19, 2016 and would also give strong consideration to the use of out of the money strikes, as opposed to the shorter term and near the money or in the money strikes.

While I still suffer with a much more expensive lot of Marathon Oil (MRO), that suffering has been attenuated a little bit in 2016 as I’ve now owned new shares on 4 occasions as it has been a repository of volatility.

That’s meant that it has had a really enhanced option premium as it has gone back and forth, changing its mind along the best of the undecided.

In doing so, its path has been higher and higher in 2016, yet those large moves have kept the premiums at very, very attractive levels.

After another assignment this past week, I would very much like to go for a fifth round of ownership, although this time, I think that I’m more inclined to consider the sale of out of the money put options, rather than the buy/writes that I had been doing.

I reserve the right to change my mind, though.

With West Texas Intermediate having fallen from and then rebounded back to the $50 level, Marathon Oil has followed suit and there isn’t too much reason to believe that the near term will bring an assault on the $47 level.

However, if it does, there is sufficient liquidity in the put market to be able to rollover those puts, although this is a position that I would also consider owning outright if faced with assignment of shares.

For those dealing with smaller lots the transaction costs differential between rolling over puts versus taking assignment and then writing calls may be a factor.

In either event, earnings are upcoming on August 3, 2016 and if owning shares or still short puts, I would likely consider utilizing an expiration date a little further out in order to withstand any possible large decline, but to also give an opportunity to secure the dividend, as paltry as it may currently be.

Finally, while the correlation between falling oil prices and rising airline prices has long ago withered and while there may not be much reason to suspect any sustained oil price decline, I’m ready to add more airline shares.

As with Marathon Oil, I still suffer from holding a much more expensive lot of shares of United Continental Holdings (UAL).

At the moment, it’s really hard to see anything positive at all, about the business.

Currency pressures, increasing fuel prices, worries over international travel are enough to include in a single sentence. However, as United Continental rebounds from its 2 year lows, I think that the slew of bad news and lowered expectations are mostly discounted.

Since United Continental does not offer a dividend and has been exceptionally volatile of late, this is one position that I would consider only through the sale of puts at this time. With that, however, you do have to be aware that earnings will be reported in just 2 weeks, so if still short those puts heading into earnings, there may be good reason to limit downside risk by rolling over the position to a date far enough into the future to allow some reasonable recovery time.

That time may be longer than anticipated, however, as my current lot of shares sits uncovered and had previously sold options with expirations 3 or more months into the future.

My actuary tells me that I may not live to regret that, so I do take some comfort in that knowledge.

Hopefully, he won’t change his mind.

Traditional Stocks: MetLife

Momentum Stocks: iPath S&P 500 VIX Short Term Futures ETN, Marathon Oil, United Continental Holdings

Double-Dip Dividend: none

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.

Weekend Update – June 26, 2016

 A week ago, the world was getting ready for what all the polls had been predicting.

Only those willing to book bets seemed to have a different opinion.

Polls indicated that Great Britain was going to vote to leave the European Union, but those willing to put their money where their mouths were, didn’t agree.

Then suddenly there was a shift, perhaps due to the tragic murder of a proponent of keeping the EU intact.

That shift was seen not only in the polls, but in markets.

Suddenly, everyone was of the belief that British voters would do the obviously right thing and vote with their economic health in mind, first and foremost.

The funny thing is that it’s pretty irrational to expect rational behavior.

In a real supreme measure of confidence, just look at the 5 day performance of the S&P 500 leading up to the vote.

Although, if you really want to see what confidence looks like, just look at the gap higher to open Thursday’s trading, as voting had already started “across the pond.”

A rational person might wonder how in the world such confidence could be inspired. Not only confidence that British citizens would vote to stay in the EU, but that the preceding day’s gains were but a prelude to more gains, rather than the prelude to the “sell on the news” phenomenon.

That could all only be explained by the often irrational action provoking “fear of missing out.”

Certainly, Great Britain’s electorate would choose to stay in the EU for fear of missing out on all of the wonderful economic benefits ahead and investors feared missing out on the party that would ensue.

What they should have feared was the arrogance that allows you to get it all wrong.

Besides, if the bookies can get it wrong, what chance do mere mortals have?

With a 4 day advance of 2%, that left the S&P 500 up a whopping 3.4% for the year, that is, until traders realized that they all got “it” wrong.

By “it,” I mean the only thing that mattered at all during 2016.

In general, the only thing that does matter is whatever occurred most recently. Nothing prior to the “Brexit” is important any longer, just as that very same vote may become an ancient and irrelevant memory in just a few days as we now start worrying about the recession that JP Morgan (JPM) economists first put on the radar screen about a month ago.

For the bookies out there, the chance of a recession in the coming 12 months was put at about 35% at that time. I may not have learned a lesson about unwarranted confidence, but I feel pretty certain that those odds may have climbed a little in the past day or so.

Following Friday’s debacle in the European Union and the fears of other member nations considering the same referendum, in addition to Scotland  putting its own breakaway referendum back on the table, there may be turmoil and uncertainty for a while.

The big question is whether with stocks now sitting at the level at which they started the year, it is time to scoop up some bargains after those big one day declines?

I certainly don’t have the confidence to do so.

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

The one thing you may be able to say about Friday’s sell off, if you absolutely have to find a positive spin, is that it wasn’t really marked by panic.

Neither was there any half hearted attempt at a rally. 

Those intra-day rallies often suck people in under the pretense that everything was simply an over-reaction and it’s all alright now.

I’m not expecting any kind of a meaningful bounce higher as we get ready to trade the new week and am not particularly anxious to hunt for bargains.

It might have been easier to consider doing so if “Brexit” had some certainty about its short term impact, but also if there was some certainty that other member nations wouldn’t be lining up to consider their own version of an EU exit.

Where I may be willing to venture is where dividends are forthcoming this week, particularly if Friday took a potentially unwarranted toll on a company’s share price.

The two that come to mind very quickly are Cisco (CSCO) and Dow Chemical (DOW).

Cisco may have actually received some good news late in the week as the International Trade Commission ruled that some of its patents were infringed upon by a competitor. That initial ruling actually came in February and may have already been discounted in Cisco’s price, but the issuance of a “cease and desist” order to the competitor may help moving forward.

Nonetheless, after Friday’s decline, Cisco shares are at about the mid-way point between its recent high and recent low and for me, that is often a good point to consider entry.

With the ex-dividend date upcoming on the first trading day of the following week, which will be a Tuesday, due to the Fourth of July holiday, I would consider the sale of extended weekly call options if purchasing shares and perhaps attempting to get 2 weeks of premium even if shares are lost to early assignment.

Dow Chemical didn’t really get much in the way of good news or any bad news on Friday. it merely went along for the ride lower.

That ride lower does have several minor areas of price support beneath it and shares have traded very steadily for the past 3 months. I tend to like Dow Chemical when it is range bound. 

It generally offers an attractive option premium while doing so and if also capturing the dividend, it can pay to wait.

Among the issues ahead that many have been waiting for is a decision over the proposed complex transaction with DuPont (DD). While there isn’t much too about anything getting in the way of the proposed deal, I think that Dow Chemical is not trading at a level that has any deal premium incorporated into the share price.

I believe that whatever the outcome, Dow Chemical shares are poised to go higher, so I would consider this as a longer term holding and I already do have shares that fall into the longer term category.

Just as with Dow Chemical, I wrote about eBay (EBAY) last week.

There had been lots of speculation that eBay was among those stocks that had substantially more to lose than many others in the event of a vote to leave the European Union.

In this case, they got it right and shares tumbled nearly 7% on Friday, although they were down only 3% for the week.

Only 3%. That’s the kind of week it was.

Now that the immediacy of the shock may have passed, this may be one position that I might have a hard time passing up.

There’s no dividend to entice anyone, but it has traded very well for the past 4 months in its current range, as it now sits near the bottom of that range.

As it has historically, eBay has provided a very nice option premium, despite the fact that it tends to trade for prolonged periods in a tight range, occasionally punctuated by moves such as experienced on Friday.

Those moves help to keep those premiums healthy and attractive.

Finally, I’m not certain that Abercrombie and Fitch (ANF) has necessarily done anything really wrong, certainly not by their historical standards of poor behavior and execution, to have warranted such a large decline in the past 2 months.

I continue to hold a single lot of much more expensive shares as shares now sit at a 2 year low.

With the ex-dividend date having been earlier this month, my inclination would be to consider a position through the sale of out of the money puts. While I might not mind taking ownership of shares at a lower price, this is definitely a position that i would prefer to rollover, if faced with assignment of shares.

I’m pretty confident of that.

 

 

Traditional Stocks: eBay

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Cisco (7/5 $0.26), Dow Chemical (6/28 $0.46)

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.

 

 

 

Weekend Update – June 19, 2016

About 25 years ago a character debuted on Saturday Night Live and the recurring joke was to try and guess the character’s gender.

The sketches typically had  red herrings and lots of mis-direction and the question of Pat’s gender was never answered.

Never a terribly popular character, someone had the fiscally irresponsible idea of making a feature film and Pat was never heard from again.

The guessing stopped.

Fast forward to 2016 and think of Pat as an FOMC member.

Over the past 2 months or so there has probably been lots of mis-direction coming from Federal Reserve Governors, perhaps as they floated trial balloons to see how interest rate action or inaction would be received by the stock market.

The health of the stock market is not really part of their mandate, but since so much of the nation’s wealth is very closely aligned with those markets, it may only be logical that the FOMC should at least have some passing interest in its health.

Who would have guessed 6 months ago when the first interest rate hike occurred that we would be at a point where that has thus far been the only one?

Who would have thought that in the transpiring 6 months nothing would have validated the December 2015 interest rate increase and that nothing but conflicting economic data would be forthcoming?

Who would have thought that the most voluble interest rate hawk among the voting members of the FOMC would this week downplay the possibility of recurring interest rate increases in what time remains in 2016?

Who would have thought that Janet Yellen would alternate between her dovish and hawkish sides and come to a point of simultaneously taking both sides?

That’s hardly the sort of thing that inspires confidence in markets.

This past week was one that if you had tried to guess what was to come next or what was to influence markets, you would have been very disappointed with your abilities.

It was a week with increasing focus on the upcoming vote by British citizens as to whether remain in the European Union. It was a week of some large moves in European stock markets and lots of disagreement not only regarding the vote’s outcome, but whether either of those outcomes would mean.

England’s bookmakers seem to have an opinion at variance with polls, but it’s anyone’s guess what the outcome will be and what the reaction will be.

It was also a week of alternating moves in our own markets as traders just grasped for direction and meaning.

On our own shores there was focus, although far less following the truly disappointing Employment Situation Report of a few weeks ago, on the FOMC Statement release and Chairman Yellen’s subsequent press conference.

With the expectation that there would be no change in interest rates, it looked as if stocks were going to re-establish its ties to oil and for one day, at least it closely followed oil’s intra-day moves higher and lower.

But that relationship clearly disappeared in the latter half of the week as some very big moves in oil’s price saw nothing in kind in stocks and sometimes saw the glimpses of rationale behavior as oil and stocks moved in opposite directions.

Then, if you would have guessed that Janet Yellen would move markets in either direction in a big way, as she has usually been able to accomplish during her press conferences, you would have been well off the mark.

(click to enlarge)

While her obfuscation found some favor the previous week, this time around no one knew what to make of trying to have it both ways.

In fact the market was virtually unchanged during the period of the press conference, including the time taken to offer the prepared statement.

As with Pat, even if you were mildly intrigued, it may have taken a lot more than that to make some kind of a meaningful commitment or to take any kind of risk.

What the market did know was that the minute that press conference was done, it was time to sell stocks.

From another brief moment of rational thought, as good as low interest rates may be, there has to be the realization that such rates reflect mediocrity and a moribund economy. Certainly no one wants the US economy to emulate that of Japan and news that German interest rates dipped into negative territory may have sent a message that the same could then happen anywhere.

Who would have guessed?

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

For the most part, despite the uncertainty surrounding the market again this week, I’m more willing to accept risk than has been the case for much of the past year.

To a large degree that’s related to the additional increment of premium being seen in some positions as volatility has been rising.

Even if  broader market volatility is going to be short lived, some individual sectors and individual positions have a likelihood of continuing to offer higher premiums due to their baseline volatility and anything additional that may come from market uncertainty.

I am considering more positions this week than I have for much of 2016 and most of those are being considered through the sale of put options, rather than outright buy/write transactions.

With the exception of Dow Chemical (DOW), which has an upcoming ex-dividend date the following week, I’m considering the sale of puts for eBay (EBAY), PayPal (PYPL), Seagate Technology (STX), Under Armour (UA) and United Continental (UAL).

WIth the exception of Seagate Technology, the others in that put sales group do not offer a dividend, so the sale of puts doesn’t have to take into consideration that possibility of subsidizing someone else for the collection of that dividend.

The list this week is fairly varied, other than for the historical connection between eBay and PayPal.

I haven’t owned eBay since it spun off its PayPal growth engine, but it has been trading precisely the way it did when PayPal was still part of its holdings. That is, it traded in a fairly narrow and predictable range, while occasionally being punctuated with price spikes at earnings. Those spikes created a decent option premium for a stock that over the longer term of the past 4 or 5 years prior to the spin off basically traded sideways.

What is interesting about eBay this week is that there is some speculation than in the event of a withdrawal from the European Union by Great Britain, it is among those stocks that stands to lose in the process.

That process, however, is being treated as if it is going to be an instantaneous one, rather than one being drawn out over years.

If I could hold onto eBay shares and serially sell calls or able to serially roll over puts, I’d be more than happy to watch that process play out over several years.

That is if it ever even gets to that.

I’ve never owned PayPal, but it is now well past that 12 months since its offering, that is usually the amount of time that I wait before considering a position.

It too has been recently trading in a range and in the longer term has been doing so ever since the initial euphoria wore off.

I think that a near term position in PayPal does carry greater risks than with eBay, as the next support level below $36 is almost 10% lower. However, the premiums available for the sale of options can mitigate some of that risk, even as financial instruments as a whole are under pressure.

I expect that pressure to be abating fairly soon as we become less convinced of a rise in interest rates and instead end up wondering who would have guessed that they would have begun an insidious climb over the summer.

I do own and suffer with that ownership, shares of United Continental. It’s certainly a bad idea to base an investment on the proposal that shares couldn’t possibly go any lower.

The size of the recent moves lately in those shares have my interest more than the recent sustained decline which came as it looked as if those shares might reclaim their 1 year high level.

Up until the latter half of April, United Continental and oil prices were very closely and directly aligned in 2016, despite the fact that the greatest increase in the price of oil came during the period before April.

Who would have guessed that increasing oil prices would be associated with increased share prices of United Continental? That relationship, though has reverted to its more normal pattern and I believe that despite the traditional summer time impact on energy prices, increasing supply will be of benefit to United Continental.

With the Brazil Olympics being one of one controversy after another, there’s probably not too much doubt that the companies that have lots at stake during the Olympics games are easily identifiable.

I still marvel at the resiliency of Under Armour when questions were raised as to whether its swimsuit design may have cost American swimmers their expected medals. They handled the situation perfectly and the world and investors quickly moved on.

Of course, one challenge may not have to wait until Brazilian festivities begin and may instead occur before trading begins on Monday.

On Monday morning we will all know whether the Under Armour wearing Stephen Curry or the Nike (NKE) wearing LeBron James will be celebrating.

In the event of a Cleveland victory in the basketball championship finals, if Under Armour takes a drop in share price, I would be very interested in selling puts into the weakness and as with eBay or PayPal, that is a position that I wouldn’t necessarily mind keeping open if it is amenable to serial rollover.

I’ve also been suffering with shares of Seagate Technology, but as far as I know it doesn’t have too much riding on a basketball game’s outcome.

What I do like about it now is that it seems to have developed some support at its current price level and that put premium is very attractive, even as that dividend yield is very frightening.

Seagate Technology and others in the storage and memory business have been written off before as being nothing more than commodities and at some point that may become an accurate description of the business, as well as prospects for growth.

Unless Elon Musk comes up with a way to carry physical hard drives up to the cloud in one of his SpaceX vehicles, the future may not shine too brightly for physical storage. But from my actuary’s perspective, a few weeks of ownership may not be overly risky, relative to the reward.

Finally, Dow Chemical is ex-dividend next week and if participating with it next week, my preference would be to buy shares and sell calls.

I already have 2 lots of shares and have been happily collecting the dividend and rolling over call options, while watching the premiums accumulate, even as shares go nowhere.

At some point, the convoluted deal with DuPont (DD) will become reality or it will be killed off by regulators.

As with Pfizer (PFE) several months earlier, I think the current price has already given back any premium that the market placed on the proposed transaction. For that reason, I think that there is little downside to adding shares of Dow Chemical at this time.

The option premium doesn’t reflect too much volatility, but the return for the sale of an at the money option is at levels that I used to see during periods of greater market volatility.

I look at that as a bonus, when considering the times we are in and the limited company specific downside potential as the summer unfolds and we await decisions.

 

Traditional Stocks: Dow Chemical, eBay

Momentum Stocks: PayPal, Seagate Technology, Under Armour, United Continental

Double-Dip Dividend: none

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.

Weekend Update – June 12, 2016

Sometimes you just have nowhere to go.

One thing that was fairly certain last week was that there wasn’t too much of a trend and there wasn’t any clear path to follow.

As markets began testing the 18000 level on the DJIA and 2100 on the S&P 500, the chorus was loud and clear.

There is no place to go but up.

The alternating chorus was that there was no place to go but down.

The market instead went sideways, but not very far as all roads seemed to be closed off.

After the previous week, which ended precisely unchanged, this past week managed to move 0.1%,

Granted, the first three days of the week did seem to benefit from Chairman Janet Yellen’s superb demonstration of how hedging your words works to allow people to hear whatever it is that they want to hear.

Following Monday afternoon’s talk, Dr. Yellen essentially said something to the effect of “It’s not good out there, but it’s all good. You know what I mean?”

Years ago I heard a fairly odd individual present a lecture on the pharmacological management of children requiring sedation. He referred to the well known age and weight based rules regarding dosages, but said they were inadequate. Not surprisingly, after listening to him for a brief while, it was only his eponymous rule that could determine the correct amount of sedative agents to administer to a child.

He referred to his rule by example and these were his precise words, that I still remember 30 years later.

“You take the kid’s weight and then you take a day like today. It’s hot, but it’s not hot. You know what I mean?”

Like Janet Yellen, he was from Brooklyn.

The old Brooklyn. Not modern day Brooklyn. In fact, both were from the same Bay Ridge Brooklyn neighborhood.

While I still remember those words 30 years later, they had no influence on me other than to believe that sometimes a monkey can have more credibility than someone with a degree.

The strength of Dr. Yellen’s words, however, starting already growing dim as the latter half of the week approached and traders were left wondering what was going to be the driver for anything between now and the July 2016 FOMC meeting.

Of course, even though most everyone discounts any action at next week’s FOMC meeting, there’s always the chance of a reaction to any change in the wording of the statement as it’s released.

In that event the subsequent press conference may carry even more weight than usual, although you would have to wonder what Yellen could say that would be substantively different from the non-committal tone she struck this week.

With earnings season nearly at its end the catalysts appear to be few between now and that July 2016 FOMC Statement release. Some upcoming and compelling GDP and Employment Situation Report numbers, particularly if there are strong upward revisions, could be all the catalysts necessary, but after this past Friday’s performance, oil prices may be relevant once again.

That’s after a couple of weeks of the stock market not tethering itself too tightly to oil prices. But with interest rates possibly taking a back seat for a short while, there may be a void to fill and oil seems the logical driver.

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

I haven’t traded much in the past few weeks, nor for 2016, for that matter, but oil has gotten more of my attention than anything else.

Although Marathon Oil (MRO) has gone significantly higher in the past 10 weeks, following Friday’s decline, I wouldn’t mind owning shares for a third time during that time period.

Following oil’s run higher and seeing it break the $50 level, that level may be under assault and those oil company shares that had moved nicely higher in 2016 may also be under assault.

Friday was an example of the risk that may lie ahead of some oil companies, but the option premiums are reflective of those risks, just as they were when I first added Marathon Oil and Holly Frontier (HFC) in the past 2 months, to keep company with my uncovered lots of shares in those companies.

Even with Marathon Oil’s decline on Friday, those shares are still somewhat higher than I would like if considering re-establishing a position. However, with any further weakness on Monday, despite the near term risk, this is probably my most likely trade for the week.

While I’m anxious to open some new positions, that doesn’t include the need to be reckless. Despite the downside risk to opening a new position in Marathon Oil, the liquidity in the options market is fairly good in the event of a need to rollover the position following a large adverse price move.

With the availability of extended weekly options if there is such an adverse price move, there would be opportunity to extend the time frame of the expiration and collect some premium while waiting for the inevitable volatility to take the price higher and then lower and then higher again.

Both Gilead Sciences (GILD) and Tiffany & Company (TIF) are ex-dividend this week.

I have some subscribers for whom Gilead has been a long time favorite and I often wished that I had followed their path. There were certainly no signs preventing me from doing so.

At almost all price points over the past 2 years, a position in Gilead, if either buying shares and selling calls or simply selling puts, would have been a good place to be, if rolling over calls or puts and having some patience.

That is the case even at most of the various high points thanks to the option premiums and the dividends and the ease of rolling over positions owing to the options liquidity offered.

With eyes only on the dividend and a short term holding, I don’t think very much about its drug pipeline or pricing pressures or opportunities that may come following the Presidential election. Having a short term horizon makes all of those sentinel events new opportunities and the latter uncertainty is still very far off.

With Tiffany shares just barely above their 2 year lows, it has been more than 3 years since I’ve owned shares.

Perhaps coincidentally, that last time was at the current price.

Back then, when only monthly options were available, my preference was to consider a purchase of shares during the final week of the monthly option cycle or when an ex-dividend date was upcoming.

This week happens to offer both, but Tiffany now offers extended weekly options.

With a much higher dividend per share than when I last owned it and a yield that is enhanced by its current price, Tiffany is back on my radar screen.

As challenged as retail has been since Macy’s (M) started off a string of disappointing earnings reports and as flat as the world’s economies have been, particularly those important for Tiffany’s sales, I think that this is both a good time and a good opportunity to consider a new position, but as with Gilead, it may require some patience.

If while exercising that patience there is opportunity to continue collecting option premiums, patience is well rewarded. With earnings more than 2 months away, I wouldn’t mind the opportunity to serially roll over calls, but also wouldn’t mind being able to exit the position prior to earnings.

Finally, I haven’t had much reason to think about buying shares of Oracle (ORCL) lately. The last time I owned shares was nearly 3 years ago and at that time I owned them on 3 separate occasions over the course of a few months.

In my ideal world, that would be the case with most stocks when opening a new position, but that hasn’t been the case for me of late. Maybe Marathon Oil will change that this week, but I think that Oracle could now be positioned to do the same.

Oracle reports earnings this week and its current price is somewhat above the mid-way point between its recent high and recent low.

I generally like to consider a purchase when a stock is at or slightly below that mid-way point. However, even with the risk of earnings approaching and without a really compelling premium despite the added risk of upcoming earnings, I’m considering a position.

However, with the chart in mind and seeing the climb that Oracle shares had taken since February, as well as the precipitous declines it has been known to take, I have no interest in establishing a position prior to earnings.

I would, however, very strongly consider opening a position if shares decline by anything approaching the 5% implied move that the options market is predicting. In that event, I would likely sell puts to open a position, but would be mindful of an upcoming ex-dividend date either late in the July 2016 option cycle or early in the August cycle.

Things have been quiet at Oracle for a while as Larry Ellison has stepped back and replaced a form of autocratic rule with muddled lines of leadership. In the past when Oracle disappointed on earnings, Ellison was always quick to point fingers.

Since I don’t currently own shares and have nothing to lose, I welcome a sharp decline in Oracle, only in the hope that it might re-animate Ellison and perhaps re-create a leadership structure that will move forward even if all signs say there is nowhere to go.



Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Gilead Sciences (6/14 $0.47), Tiffany & Co (6/16 $0.45)

Premiums Enhanced by Earnings: Oracle (6/16 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.

Weekend Update – June 5, 2016

While so many people are still confused over the “Transgender Bathroom” issue, the real confusion came from this week’s Employment Situation Report.

With the odds of an interest rate hike by the FOMC’s June meeting seemingly increasing every day, you would really have to believe that the FOMC knew what was going to be in the economic news cards.

The increasing hawkish talk all seemed to be preparing us for a rate hike in just 2 weeks. Judging by the previous week’s market performance you would certainly have been of the belief that traders were finally at personal peace with the certainty of that increase.

The concept of being at personal peace is confusing to some.

I’m personally confused as to how it could have taken so long to see the obvious, unless we’re talking about stocks, interest rates and investor’s reactions.

What I find ironic is that the proposal for all inclusive bathrooms is really age old, at least at the NYSE, when there was a recent time that there was only a need for a single sex bathroom, anyway.

Just like many of us know, what a great degree of certainty, which camp we belong to when nature beckons, the lines seemed to be increasingly drawn with regard to interest rates.

Even as the talk heated up there were still clear interest rate doves, albeit in diminished numbers compared to their hawkish brethren, sistren and “transgendren.”

Now, though, the certainty is muddled.

Since I don’t use public restrooms, I don’t really understand all of the controversy, nor do I understand the angst over a suspected 0.25% interest rate increase.

Nor do I understand why grown and highly educated men, women and others could be so engaged in their spreading their convictions, which even under the close scrutiny of historical hindsight, could never be validated.

With this past Friday’s Employment Situation Report most everyone was taken by surprise. Not only were current job creation numbers lower than expected, but downward revisions to previous months didn’t help to paint an optimistic picture, even as the unemployment rate continued to decline.

So what about that June interest rate hike that had been increasingly suggested by those in a position to decide?

You do have to wonder whether the Federal Reserve members are testing the waters among the investing community and gauging responses.

I hope not.

I don’t think that they really need a triple mandate or need to have their focus sullied. It’s enough that we’ve already seen an FOMC that expresses concern over China and may be further influenced by EU interest rates and even the possibility of Britain’s exit from the European Union.

No doubt that everything going on in the world just adds to the confusion. While the FOMC continually avers that it is “data driven,” perhaps it would be helpful to know what data is under the microscope and how it is weighted.

It might even be instructive to know what the data considered had been when the December 2015 interest rate increase was announced.

Nearly 6 months later it may still be difficult to see what the FOMC had seen based on the existing data and projections.

The market, in its confusion, finished the past week absolutely flat, although it did recover from some significant losses during three of the shortened trading week’s sessions.

That included a recovery following Friday’s early morning confusion. Those recoveries, though, may only lead us to a week or so of perpetuating the confusion as we wonder whether the FOMC has been setting up the market for a summer rate hike or whether the FOMC has just been completely misreading the economy.

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

I didn’t open any new positions last week and there doesn’t really seem to be much indication as to what the coming week holds, so I’m not overly certain about my activity level.

That extends to stocks, too.

But with some of its recent weakness and a healthy dividend, I think that it may end up being a relatively easy decision to add to my General Motors (GM) holdings.

It is now at a price approximately mid-way between recent highs and lows and that is often one of my preferred entry points. I also often prefer an entry point right in advance of an ex-dividend date, so the stars may be aligning for General Motors.

Already owning shares of both General Motors and Ford (F), the current lots that I own aren’t generating any premium income and they are only made tolerable by their premiums.

While I expect that each will someday make contributions beyond those dividends, I look at each lot of shares as a standalone entity and see an upcoming lot of General Motors as a vehicle for a premium, a dividend and perhaps some small capital appreciation, as well.

I also own some shares of Macy’s (M) and they were the first retail earnings disappoi8ntment of this recent earnings season. One of my current lots is uncovered and like General Motors, the dividend makes it tolerable, as do previously accumulated option premiums.

Macy’s is ex-dividend on Monday of the following week. I especially like those kind of situations where there may be an unity to purchase shares and then sell in the money calls with an expiration date of the week of the ex-dividend.

In such cases, if the shares are assigned early, they must be called away at the end of the current week. In that case, the call seller effectively receives an enhanced weekly premium. That enhancement, which comes from the time portion of the premium, in essence is like getting a portion of the dividend.

However, in this instance, I may consider an extended weekly option, but perhaps using a near the money strike price, anticipating some continued capital appreciation in shares, as well.

If that capital appreciation materializes before the ex-dividend date, the chance for early assignment may still exist, but the loss of the dividend could easily be offset by the combination of option premium and capital appreciation, along  with the opportunity to take assignment proceeds and put them back to work the very next week.

Finally, sometimes in the midst of confusion, there is opportunity.

I don’t know of anyone who believes that interest rates are going to continue staying where they are and they certainly can’t get much lower.

Of course, that kind of confidence is bound to get slapped down and reminds me of the same belief when it came to the price of oil.

But the reality is that Friday’s Employment Situation Report shock probably won’t last too long insofar as the interest rate sensitive financial sector is concerned. The rates on the 10 Year Treasury have gone up and down in fits and starts and following Friday’s decline is at a fairly well established level of support.

With that in mind, I have a hard time deciding between MetLife (MET) and Morgan Stanley (MS) and may consider both as the week is ready to begin.

While neither should be considered as harboring undue risk, their option premiums are reflective of undue risk.

However, as opposed to stocks that truly do reflect significant risk and are typically best suited for shorter term holding periods, both MetLife and Morgan STanley could easily be held for the longer term and offer attractive dividends, as well, in the event of a longer term holding period.

As I’ve done recently with some energy holdings, which have certainly been volatile, I would embrace the enhanced premium and even consider rolling over positions if they were likely to be assigned, as well.

As long as those premiums are enriched, the lure of holding onto those positions, particularly in light of a real risk that may be less than the perceived risk, is strong.

There isn’t too much confusion about that in my mind.

Traditional Stocks: MetLife, Morgan Stanley

Momentum Stocks:  none

Double-Dip Dividend:   General Motors (6/8 $0.38), Macy’s (6/13 $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.

Weekend Update – May 29, 2016

We’ve all been part of one of those really disingenuous hugs.

Whether on the giving or the receiving side, you just know that there’s nothing really good coming out of it and somehow everyone ends up feeling dirty and cheapened.

Every now and then someone on the receiving end of one of those disingenuous hugs believes it’s the real thing and they are led down the wrong path or become oblivious to what is really going on.

This week the market gave a warm embrace and hug to the notion that the FOMC might actually be announcing an interest rate hike as early as its June 2016 meeting.

The chances of that even being a possibility was slight, at the very best, just 2 or 3 weeks ago. Since then, however, there has been more and more hawkish talk coming even from the doves.

The message being sent out right now is that the FOMC is like a hammer that sees everything as a nail. In that sense, every bit of economic news justifies tapping on the brakes.

Traditionally, those brakes were there to slow down an economy that was heating up and would then lead to inflation.

Inflation was once evil, but now we recognize that there are shades of grey and maybe even Charles Manson had some good qualities.

With the market’s deep hug of affection the S&P 500 ended the week 2.3% higher, seemingly sending the message that investors had grown up a lot in the past week or so and were now able to realize that another small increase in the interest rate was a reflection of an improving economy.

That should be good for everyone, right? 

Hugs all around.

So before anyone gets too giddy, it may be worthwhile to look at that last embrace that the market gave when it suspected that an interest rate hike was imminent.

That was in December 2015.

The market started to act in a mature fashion in what would turn out to be 5 days in advance of the FOMC’s December 16th announcement.

click to enlarge)

Maybe in what is best an example of “buy on the rumor and sell on the news,” the market started a swoon that was far in excess of the climb.

The first 6 weeks of 2016 were as bad as the first 6 weeks of any preceding year.

In the nearly 4 months since the market’s post-interest rate increase correction, we are left barely 1.5% away from the S&P 500’s all time high level.

Whether the FOMC’s read on the economy is correct or not, having now made that embrace, the market is likely at some kind of an inflection point heading into the June meeting.

I’m not entirely convinced that the hug this week was entirely disingenuous, after all, what were the other choices left to investors?

Continue following oil for the wrong reasons?

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

In the “Comments” section of  last week’s article a reader asked about my opinion on iPath S&P 500 VIX Short Term Futures ETN (VXX).

I’ve scanned my computer for malware to see if he had been reading my draft for this week. I think that malware may have placed the “Charles Manson” reference earlier.

For those that do look at volatility and various volatility instruments, there can be lots of risk and potentially reward in being on the correct side of a bet.

A bet. Not an investment.

In this case, there is simply the question of where the market is going and in how big of a leap and bound.

I think that the next leg is lower, although that next leg may not start for another few weeks.

However, I generally like to consider the use of iPath S&P 500 VIX Short Term Futures ETN in advance of those moves.

In a very superficial explanation, the volatility, which is a measure of uncertainty, generally moves lower when the market heads higher and reverses course as the market reverses course.

“The VIX” is now at a 2 year low after having hit a nearly 1 year high on February 11, 2016. If you believe in coincidences, that happened to be the market low point for 2016.

What “The VIX” really offers, as a result of its own volatility is an attractive option premium, whether buying shares of the ETN and then selling calls, or selling puts. It also tends to have great liquidity, which is especially important if faced with a move that goes counter to your expectation.

At this level, with an expectation that the market could be heading lower on a “sell on the news” reaction, I would expect “The VIX” to head higher.

If buying shares and selling calls, I might consider using the June 2016 expiration, while I might use the weekly expiration if selling puts. In the latter case, I would be prepared to rollover those puts if faced with assignment and then might elect to do so using that same monthly expiration date.

As long as I’m considering a bet, this may also be a good time to add some shares of Las Vegas Sands (LVS) to my existing shares that are in deep loss territory.

It’s hard to know what Las Vegas Sands really has going for it, as the story for the past few years has been entirely focused on Macau and Sheldon Adelson’s politics.

What has kept me holding shares has been the dividend and the belief that there will be either a reversal of fortune in the long term in Macau or official Chinese government economic data will give an impression of a resurging economy in the short term.

With an ex-dividend date coming up on the first day of the July 2016 monthly option cycle, my preference would be to steer clear of the long term and hope for some short term reward.

With the appearance of some base forming at its current level, I might be interested in buying shares and selling either an extended weekly call on a date after the ex-dividend date or simply going to the July 2016 monthly option contract.

In the years that I have been offering this weekly take, I’ve never included a stock position that I had absolutely no intention of buying, but this week, I do like Bank of America (BAC).

I like it for the obvious reasons.

As long as the market continues embracing the idea that an interest rate increase is a good thing, then financial sector stocks may be a reasonable place to park money.

In Bank of America’s case, it is also ex-dividend this week. However, instead of considering selling an in the money weekly option in an effort to get some of the dividend subsidized by the option buyer, I would rather try to get some stock appreciation and the dividend, in addition to the option premium.

The reason I won’t be buying shares is that I already own 3 lots and I trade with a particular set of rules. One of those rules is that I not hold more than 3 lots of any stock.

Someday I may fine tune that to give me some more flexibility, but as long as it is still a rule, I follow it and try to stay away from making decisions on the fly.

Finally, I never like Abercrombie and Fitch (ANF) as anything other than a chance to make, hopefully, a quick trade.

Often times, that’s not how it works out for me, but I insist on going back for me, over and over again.

This time, it’s hard to ignore the steep decline after earnings. That’s true, despite the fact that a steep decline after earnings shouldn’t be anything exceptional when it comes to Abercrombie and Fitch.

What attracts me to it is that it is back below the last price that I purchased shares and also happens to be ex-dividend this week.

For my temperament, that’s a good combination when faced with the “hot mess” that Abercrombie and Fitch shares have been for quite some time.

The option market clearly has low expectations for Abercrombie and Fitch this week as the in the money call premium, in what is a holiday shortened week, is really very high, particularly with the dividend factored into the equation.

Can those shares go substantially lower?

If you don’t know the very probable answer to that question, this is one stock and call sale you should avoid, just as Abercrombie and Fitch did strive to avoid a certain “uncool” demographic.

That demographic certainly included me and maybe nearly everyone i have ever known and that turned out to be a problem when your accountant doesn’t really care where the money is coming from.

But I hold no grudge as those shares, beaten down as they are, may offer a reward far in excess of the slight that Abercrombie and Fitch cast toward my people.

Maybe it’s time for that mutually rewarding embrace.

 

Traditional Stocks: none

Momentum Stocks: iPath S&P 500 VIX Short Term Futures ETN, Las Vegas Sands

Double-Dip Dividend: Abercrombie and Fitch (6/1 $0.20), Bank of America (6/1 $0.05)

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.