Weekend Update – May 22, 2016

If you could really dodge a bullet, magicians from Harry Houdini to Penn and Teller would never have had to perfect the ability to catch them in their teeth.

Yet, we may have dodged a bullet this past week.

Forget about the fact that the stock market still seems to like the idea of higher oil prices. We’ve been dodging the impact of increasing oil prices through most of 2016. At some point, however, that will change. That bullet has been an incredibly slow moving one.

What we dodged was a second week of terrible retail earnings and continued over-reaction to the thought that a June 2016 interest rate hike was back on the table, as  Federal Reserve Governors are sounding increasingly hawkish.

Not that there wasn’t a reaction to the sense that such an increase was becoming more likely, but some decent earnings data coupled with increased inflation projections could have really fueled an exit for the doors.

Normally, those bits of news could have been construed positively, as reflections of an early phase of an economic recovery. However, the market has spent much of the past year wavering back and forth trying to decide whether to interpret good news and bad news for what they really were, rather than exercising intermittent bouts of reverse psychology.

Instead, the market closed the week on a high note, even ending 3 consecutive weeks of declines and with a gain large enough to keep 2016 in positive territory.

But only by the skin of its teeth.

My guess, as a licensed professional, is that the skin of your teeth gets increasingly thin the more you catch those bullets, though.

There’s not too much economic news ahead in the coming week, although the week does end with the GDP release, preceded by a withering stream of corporate earnings.

For those who bet on the odds of a  June 2016 FOMC interest rate increase announcement, the GDP may be an important bit of data, even as many retailers, arguably with a better finger on the pulse of the consumer, have only  seen their own revenues and earnings wither.

What the FOMC sees may be entirely different from what the boots on the ground, those spending their paychecks and those happy to trade goods for cash, are seeing. That may have also been the case back at the end of 2015 when the FOMC did raise interest rates as those boots were marching nowhere fast.

It takes fast moves to dodge those bullets, but the pace of economic growth still seems so slow, even as there may be some signs of it quickening.

Perhaps, from the FOMC’s perspective, the interest rate hike of 2015 prevented the initiation of overheating and the current state calls for another dose of that kind of prevention. That mat be especially true if the goal is to continue to dodge the kind of uncontrolled inflation increases seen more than a generation ago.

That bullet has been particularly slow in moving, but maybe once it gets too close it may be hard to dodge, as a toothless FOMC has little other in the way of alternatives.

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 had many assignments in 2016, even as I’m pleased with the year to date. I’d be much more pleased, though, if I had more cash coming from more assignments of positions.

This coming week, with no positions set to expire and only a couple of ex-dividend positions, I’d like to find a reason to spend some of what little cash I have to generate some additional income for the week.

The allure of dividends is higher for me when I don’t have other immediate prospects of sufficient weekly income and that is the case this week.

That brings Corning (GLW), Dunkin Brands (DNKN) and Sinclair Broadcasting (SBGI) to mind. All have now gotten earnings out of the way, so have at least one less complication whenever considering a new position and having a relatively short time frame in mind.

The latter two only have monthly options available, but as I look at my sales for much of the past year, there has been more and more emphasis on the use of monthly or even longer expiration dates. Of course, while not necessarily embracing the idea of facing another earnings report, the use of monthly options means that the potential need to roll the short call position over brings you closer and closer to the risk of earnings.

Both Dunkin Brands and Sinclair Broadcasting have similar 2016 charts. Both are approximately at the mid-points between their recent highs and recent lows, as they both have been heading lower

That’s often a point that I like to consider as an entry.

While for those that live in the Northeast and increasingly elsewhere think of Dunkin Brands as ubiquitous, Sinclair Broadcasting is very much the same, just much less obviously.

It’s terrestrial broadcast properties are everywhere and it is increasingly venturing into original content and cable properties, as it has a long history of acquisition and strategic media market shifting.

I just like owning it because it trades in a fairly predictable range, has a nice premium and a good dividend, although earnings do sometimes present a challenge, or an opportunity, depending on your perspective. 

Dunkin Brands strategy hasn’t included acquisition of late, but it is definitely a strategy of expansion, both in the number of locations and in the number of offerings, seeking to rid its locations of excess capacity.

Like Sinclair Broadcasting, its range is fairly predictable and it has the nice combination of premium and dividend. That’s a non-caloric sweet combination.

Corning, unlike Dunkin Brands and Sinclair Broadcasting is now moving a bit higher after having sustained a more than 10% decline after its earnings were announced last month.

It offers weekly options and I’m not terribly interested in doing much more than a week. However, while likely selling an in the money option in the hope of having some of the price decline from the dividend get offset by premium pricing, I would probably rollover the position if I believed that it was likely to get assigned early.

At the same time, at its current price, I might also consider rolling the position over, even if likely to be assigned upon expiration, in an effort to continue collecting a premium.

That brings me to retail and more retail.

Macy’s (M) started the sectors bad news off just 2 weeks ago and has been brutalized, even as Wal-Mart (WMT) finished the 2 weeks of major retailer earnings on a very positive note.

I already own 2 lots of Macy’s and am ready to add another, at what I believe is truly a bargain price among a sea of bargain priced appearing stocks.

While I normally do prefer weekly options, I may start off that way if making a purchase of shares, but would consider rolling over for a longer term, if only for the pursuit of its upcoming dividend.

With its very recent sharp decline, Macy’s call option premiums are more attractive than is usually the case. For those more interested in the sale of put options as a back door means toward ownership, that is a reasonable approach. I would, however, if faced with assignment roll those puts over until the point of ownership becomes more favorable as the week of the ex-dividend date approaches.

I may be the last guy to be seen wearing anything by Under Armour (UA) and don’t believe that I’ll be needing any of its wonderful wicking action, but I think that it is one of those true bargains amongst that sea of “posers.”

With weekly options and decent liquidity, I think that the generous premium offsets the near term risk.

Finally, where there may be more risk would be in the consideration of either Best Buy (GME) or GameStop (GME) as they both report earnings this week.

GameStop has had its epitaph written and re-written many times. It has both rewarded and punished short sellers over the years as it has had consistently large fluctuations in price, but has confounded those who have believed that its near term was extinction due to its inability to dodge the bullet of a changing landscape.

AS with most earnings related trades, my preference is to sell puts at a strike level outside of the range implied by the option market, as long as the weekly ROI is 1% or greater.

Based upon Friday’s closing price the lower boundary determined by the option market is the $26 strike level, while a 1.1% ROI could potentially be obtained at the $25.50 level.

That’s not too much of a cushion.

As an aside, the weekly open interest for GameStop is quite a bit heavier on the call side, which makes me think that the other side should at least be recognized. If you are a contrarian, that may speak to a decline at hand.

So while I do prefer selling puts into earnings when shares have already been in a declining mode, as they have been with GameStop, that small safety cushion has me more likely sitting on the sidelines, hoping to dodge a bullet, until earnings are announced at the close of trading on Thursday. At that point, I would pay attention to more than the price and where it might open and trade on Friday. I would also look for any dividend related news as it is expected to be ex-dividend as early as the following week.

Dividend news may be as significant as anything else, as GameStop has a very generous dividend and you always have to have some concern about its safety if cash flow is strangled. Heading into earnings, though, GameStop does seem to have a low enough payout ratio to at least withstand another quarter of dividend obligations.

If shares do decline after earnings and the dividend is left intact and an ex-dividend date for the following week is announced, I would strongly consider a buy and write approach. However, if the ex-dividend date will be the following week, I might instead consider the sale of puts.

Best Buy has also had its epitaph written and has somehow survived as more than just Amazon’s (AMZN) showroom.

Like GameStop there is a dividend in the near future.

However, the option market is giving a little bit bigger of a cushion if selling puts in advance of earnings.

Based upon Friday’s closing price, the option market is predicting a price range of about $29.50 – $35.50.

A 1% ROI may be potentially achieved even with a 13.4% decline in share price. I find that cushion far more appealing than for GameStop and would consider the sale of puts before earnings.

As with GameStop I would use the news of the upcoming ex-dividend date to determine what to do, but this time with regard as to what to do if faced with assignment. With good liquidity, I’d try to rollover those puts, but if faced with considering another rollover heading into the ex-dividend week, I would much rather own the shares and collect the dividend rather than partially subsidizing that dividend for the put buyer.

Traditional Stocks:  Macy’s

Momentum Stocks: Under Armour

Double-Dip Dividend: Dunkin Brands (5/25 $0.30), Corning (5/26 $0.13), SBGI (5/27 $0.18)

Premiums Enhanced by Earnings:  Best Buy (5/24 AM), GameStop (5/26 PM)

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

Weekend Update – May 15, 2016

It took every last bit of my courage to jump out of a plane.

That was with a parachute and I only did so after suspending all of the logical and rational thoughts that I possessed.

Sometimes you do very uncharacteristic things when you want to impress someone for some other kind of excitement.

No other level of excitement could ever be high enough to get me to further suspend logic to engage in a free fall, though.

I don’t care how exhilarating it might be, staying alive seems more exhilarating to me.

Some free falls don’t require your consent, though and unless you’ve positioned yourself short in advance of the free fall, it’s definitely not an exhilarating process.

The past week was one in which oil wasn’t the prevailing theme even as it had its own large moves.

Instead, it was the free fall of retail, led by Macy’s (M) and Nordstrom (JWN), arguably among the best of the major national retailers, that characterized the stock market.

Of course, Macy’s and then Nordstrom took most every other retailer down with them and were able to drag along many others.

That kind of free fall, though, leaves open the question of exactly where the floor happens to be. 

On a positive note, hitting the floor after a market free fall is probably a lot better than hitting the floor following a recreational free fall and you do get the chance to play the game a bit longer.

What Macy’s and Nordstrom may be telling us, and what Limited Brands (LB) suggested the prior week, is that the consumer isn’t exactly a willing participant and may instead be a lead weight on the economy.

That lead weight won’t speed up a free fall descent, as we are fortunate to be governed by some inviolate laws of physics, but they sure can make it difficult to climb back up again.

With a disappointing Employment Situation Report and disappointing GDP growth, for those, such as myself, who had hoped that perhaps retail could paint a somewhat different picture of consumer participation, there was no different picture.

It seems that investors are appropriately recognizing the weakness in retail and the weakness in job growth as not being worthy of celebration.

Sometimes bad news really is bad news.

There are many more important retailers reporting this week, but it’s not too likely that there will much in the way of upside surprises, unless expectations for Wal-Mart (WMT) are so low and results buoyed by those who, in the past quarter. stopped shopping at Macy’s.

With last week’s loss, we are about to enter the sixth month of the year with the S&P 500 barely 0.1% higher. 

The first 3 months of 2016 was a story of two equal halves moving in big ways and in opposite directions. The past two months, however, have been a story of vacillation and moving nowhere and leaving few fulfilled.

We may find out exactly where the floor may be as the coming week comes to its end.

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

For the first time in 2016 I have a decent number of options contracts expiring as the monthly cycle comes to its end.

For me, 2016 has been a year of very little trading and I’m looking forward to the opportunity to get some assignments and rollovers, as long as that free fall doesn’t continue.

While there are some positions that I wouldn’t mind adding this week, it may be yet another week with very little reason to add any new positions.

Among those that have some interest for me are ex-dividend stocks Mattel (MAT) and Microsoft (MSFT).

I had shares of Mattel assigned at $33 in January 2016, after 15 months of holding.

There was a time when I would have thought that an 18.4 % return, including dividends, for a 15 month period was pretty mediocre.

During that same time period, the S&P 500, without accounting for dividends, was 3.3% higher. 

That’s even more mediocre.

Mediocre may be a good way to describe Mattel, particularly in relationship to Hasbro (HAS), as Mattel just seems to wax and wane along with Barbie. Going on the “Mattel Shop” website doesn’t do too much to make you believe that there is anything exhilarating to be had.

What I do like about Mattel is a chance to buy shares, at a price lower than which I had them assigned away from me and a chance to capture the dividend.

When I last owned Mattel shares it only offered monthly option contracts, but now there are weekly and extended weekly contracts. If buying shares, I would sell the weekly at the money call, but if faced with the need to rollover the position, I would consider a longer term and a higher strike price.

Microsoft has just started to have a little recovery from its sharp earnings related decline. It’s not that often that you can find Microsoft trading at a nearly 10% discount to where it had recently been, but this is one of those opportunities.

It’s not likely held hostage y the price of oil, nor by the fortunes at Macy’s, nor Wal-Mart.

What it has is upside potential following that fall, a nice dividend and an attractive premium.

As it goes ex-dividend, I would likely consider the same strategy, as with Mattel, if faced with the need to rollover the short call option position.

As long as in the technology arena, Cisco (CSCO) reports earnings this week and will be ex-dividend in early July.

Normally, I like to consider the sale of weekly puts on an earnings related trade when it offers a 1% ROI or greater at a strike level that’s outside of the limit defined by the “implied move.”

In Cisco’s case, that’s not the case, as the implied move is 5.6% and the reward that I seek for that risk just isn’t there, at least not for a weekly put sale.

Where I do see some potential for reward is in the belief that Cisco may have already sustained a decline fueled by Microsoft and may have some upside potential in the months following.

For that reason I am considering the purchase of shares and sale of longer term calls prior to earnings being reported. However, if that is more exhilaration than someone is willing to endure, the alternative is to wait until after earnings and then in the event of a decline in price, to consider doing the same, but at a lower strike price.

General Motors (GM) is recovering from its February 2016 lows and doing so through a series of higher lows. I like that pattern and also have an eye on its upcoming ex-dividend date in the early part of June.

With a price increase in mind and that eye toward the dividend, I would consider the purchase of shares and again select a longer term call option sale than I would normally prefer when initiating a new position. In this instance, that would mean a June 2016 or beyond expiration date and select an out of the money strike level.

Finally, if you believe in “death by retail,” there’s always Abercrombie and Fitch (ANF).

These days, no one has great admiration for the company, but you do have to admire the steady climb it made, beginning with earnings in November 2015 and again in February 2016.

Of course, you also have to be in awe of its history of sharp declines, which now includes the past two moths.

Abercrombie and FItch doesn’t report earnings until May 26, 2016 and could easily get dragged down this coming week as other retailers take center stage.

Along with that uncertainty associated both with the sector and with Abercrombie and Fitch itself, the premium for the sale of out of the money puts is fairly attractive.

In the event that shares do take a decline and you are faced with having to take assignment of shares, a decision has to be made as to whether to attempt to rollover those short puts into the week of earnings when the premium will truly be enhanced or to take the assignment.

The key factor may be the, as yet unannounced, ex-dividend date.

Abercrombie and Fitch has an attractive dividend and I am loathe to sell puts in the face of an ex-dividend date.

If the ex-dividend date is n the same week as earnings, I would be more inclined to take assignment of shares and then sell out of the money calls on those newly assigned shares, utilizing a longer term time frame.

If the ex-dividend date is the week following earnings, then I would consider simply rolling over the puts to the week of earnings and then playing it by ear, once again coming to the same decision tree if faced with the option buyer exercising their rights.

These days, dividends and premiums and the chance to serially accumulate them are all the exhilaration that I need or can survive. 

 

Traditional Stocks:  General Motors

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Mattel (5/17 $0.38), Microsoft (5/17 $0.36)

Premiums Enhanced by Earnings: Cisco (5/18 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 – May 8, 2016

Depending upon how concrete you are in interpreting the meaning of the concept of “the circle of life,” the beginning and the end of that circle must be identical events as their points in space are coincident.

Various religions and philosophies believe that through a certain life path, another life awaits, but the rigorous requirements of geometry may be put aside in the process.

It’s also not clear that there had been any data dependency in the formulation of the philosophical concept.

Life, death and re-birth almost reads like a stock chart, except that the stock chart is plotted over time.

While new life generally brings joy, a geometric centric definition of “the circle of life” would both begin and end with that kind of joy.

On the other hand, a more philosophical interpretation of the concept has some diametrically different events, death and life, coinciding as the circle is closed.

Philosophy aside, markets have their own circle of life.

Start where you like in defining that circle, but among the components are low interest rates; increasing business investment for growth; increasing productivity; increasing corporate profits; increasing employment; increasing consumer spending; higher prices; higher interest rates; decreasing business investment; decreasing productivity;  decreasing employment; decreasing consumer spending and on and on.

That’s more or less a traditional look at the way things usually go, but at the moment it’s hard to know where in that circle we are or if we even have a circle.

If the top of the circle represents the highest point of an economy, I think that I would have to agree with Stanley Druckenmiller, who at this week’s Sohn Conference expressed the belief that the bull market was exhausted.

That would lead one to believe that perhaps revenues and more importantly corporate profits had now peaked and that the eventual tonic to return to a virtuous cycle of increases across the board would be to lower interest rates.

Lower? But the FOMC, claiming to be data dependent, has clearly been ready to increase them.

One has to question where the data was when rates were increased late in 2015, but Druckenmiller also quipped that “quite ironically, this is the least ‘data dependent’ Fed we have had in history.”

The circle of life tries to put a positive spin on what we all will inevitably face, but if late 2008 and early 2009 represented the inevitable bottoming out of the economy and stock markets, with the exception of stock prices since that time, it is still difficult to see real evidence of a re-birth having had taken place.

Increasing employment? Yes, but where is the spending? Where is the upward pressure on prices? Where are the corporate profits?

Where is the reason to increase interest rates?

This past week was an interesting one, with investors not really knowing what to believe or where on the circle we were standing.

With both the ADP Report and the Employment Situation Report coming with disappointingly low numbers, investors are left with wondering what to do about bad news.

You can’t blame them for being undecided as to whether bad news is good news for stocks or truly bad news for everyone.

With this earnings season having been fairly lackluster to date, we’re now faced with retail earnings and there is already reason to believe that they will be less than robust.

If that turns out to be the reality, it’s difficult to see the sunny side of the circle or how we can get there.

If we keep counting on the stock market following oil higher, there may be some real disappointment ahead, as the underside of the circle is more likely to reduce demand for energy.

Of course, simply following oil higher, as has been the case for the past two months in the absence of real demand increases, is also a sure path to disappointment when reality finally checks in.

On a positive note, if you’re the kind that prefers to live in the ascendancy of a civilization, there is some comfort in the belief that the bottom of the circle may be nearing.

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

With its earnings now out of the way, Icahn Enterprises (IEP), not to be confused with Icahn Capital Management, goes ex-dividend this week.

Given Icahn Enterprise’s share price trajectory, it wouldn’t be too surprising if its major share holder, Icahn Capital Management took on an activist role and perhaps tried to unseat management and board members, replacing them with their own, in a true circle of life exercise.

That scenario is pretty unlikely, but one does have to wonder whether Icahn Capital Management, now armed with lots of cash from its sale of its Apple (AAPL) position might not consider Icahn Enterprises to be bargain priced.

Given a nearly 11% dividend that may be reason enough for Icahn’s hedge fund to add shares and keep it far the single largest holding of Icahn Capital Management.

On the downside, if considering a purchase, I would look at this more of a long term commitment, particularly as only monthly options are available and there are $5 strike units instead of the $0.50 ones that I prefer in the weekly variety of expirations.

Following the much larger than expected loss reported by Icahn Enterprises, which included both shortfalls on the top and bottom lines, there’s probably some consternation going on, particularly as Icahn might like to have a cleaner balance sheet before being nominated as Treasury Secretary.

I’ve never visited a Shake Shack (SHAK), but have been tempted the few times I’ve been in the vicinity of one. Fortunately, my better half reminds me that I may be just one clot away from the dark side of the circle of life.

After a flurry of buying and more buying after its IPO, lasting for about 2 months, I’m finally ready to consider a position, as Shake Shack reports earnings this week.

I generally like to wait at least 6 months before considering a new position in a new public company and we are now into the early part of the second year of shares trading.

Since Shake Shack has no dividend to factor into the equation, any consideration of opening a position before or after earnings is fairly straightforward for me.

I would only consider the sale of puts.

With an implied price move of about 8.7%, a 1% ROI on the sale of a weekly out of the money put could be achieved at a strike price approximately 9.7% below Friday’s closing price.

ANything outside of the range predicted by the option market that returns 1% of more is fair game for consideration.

However, the trend for Shake Shack over the past few quarters has been to move lower after earnings have been announced and to surpass the levels predicted by the option market.

For that reason, if considering a position, I would be most inclined to do so after earnings. In the event that shares take a large drop lower, I would entertain the thought of selling puts, but might wait a bit to let some of the dust settle.

It was a tough week or two for some energy stocks, but I’m ready to re-visit a position that I had assigned just a few weeks ago.

I can’t necessarily say that there is anything inherently better about considering a position in Marathon Oil (MRO) over Exxon Mobil (XOM), but I have been burdened by a much more highly prices position in the former and I do like the idea of whittling down some of those paper losses with some high priced premiums from the purchase of new shares and sale of calls.

AS an example of the potential return, based on Friday’s $12.03 close, the sale of a weekly $12 call option at a premium of $0.44, would result in an ROI of 3.4% if assigned.

That could be a big “if,” however, there is sufficient liquidity in those options to likely be able to find a reasonable marginal ROI for subsequent weeks, if continuing to roll over that position, perhaps taking advantage of the availability of extended weekly options to buy some time if awaiting a price rebound.

Finally, in a week where my considerations are more toward taking on risk, there’s some comfort in a company like Pfizer (PFE), which is ex-dividend this week.

There is a general consensus that Pfizer is dead money unless it does something very substantive. There was a time when that meant coming up with a new blockbuster drug.

Now, that means buying some other company that can come up with or has a blockbuster drug, as if Pfizer has no ability to do that on their own. That’s despite having a good number of promising drugs in Phase 3 and that have decent sized target risk 

Pfizer is now trading near the level to which it climbed when rumors of a deal with Allergan (AGN) broke. Even as news of that deal breaking apart became known, Pfizer shares had already given up the market’s premium.

As the Allergan deal is now dead and not likely to be subject to re-birth, the sector is alive with activity and Pfizer isn’t likely to sit on the sidelines.

Unless it engages in a bidding war, the market is likely to look at any initiatives as being good for the company and I would expect share price to rise.

In the meantime, there’s the dividend and the option premium.

I wouldn’t mind if Pfizer just traded in a range for a while and would be happy to see a different virtuous cycle of life.

One that sees the opening of a short call position, then its expiration, only to be followed by the sale of yet another.

 

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Icahn Enterprises (5/10 $1.50), Pfizer (5/11 $0.30)

Premiums Enhanced by Earnings: Shake Shack (5/12 PM)

 

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

 

Weekend Update – May 1, 2016


There was potentially lots that could have moved the market last week.

Earnings season was getting into full swing as oil continued its march higher.

As if those weren’t enough, we had an FOMC Statement release and a GDP report and even more earnings to round out the week.

But basically, none of those really mattered.

The FOMC expressed some confidence in the economy even as the GDP may have said otherwise the following day and earnings were all over the place with the market not being very forgiving when already lowered expectations weren’t met or were being pushed out another quarter.

Again, none of that mattered.

What really mattered was when Carl Icahn, who unlike Chicken Little, calmly told the world that he had sold his entire stake in Apple (AAPL) for fears of what China’s “attitude” might be with regard to the company.

The initial interviewer misinterpreted Icahn’s comments to mean that he was worried about the Chinese economy itself and that may have been exactly how traders interpreted Icahn’s words, although a second interviewer correctly interpreted Icahn’s comments and got him to add clarity.

Icahn confirmed that he was actually worried about the possibility that China would be less of a reliable partner for Apple and not that he envisioned a new round of meltdowns in the CHinese economy or in their financial institutions.

Big difference.

The reaction to Icahn’s exit was pretty swift and not only in shares of Apple, which already had a disappointing earnings report the prior day and saw shareholders faced with a large overnight losses.

Icahn’s sense of calm in reporting that perhaps the Chinese sky was falling down on Apple was in contrast to Chicken Little in another very different way.

Chicken Little, while he may have been wrong about the sky falling, had good intentions for society as he sought to spread the word so that everyone would have an opportunity to seek protection.

Not that Carl Icahn had any obligation to do so, but his exit from Apple and the sounding of the warning came too late for most.

Beyond that, I’m not too certain that any suggestion or interpretation of a clarion call from Icahn leading to the exit from stocks is intended to do anything other than leave him in a better position as a predator.

Given that Icahn Capital Management’s largest holding is in the eponymous Icahn Enterprises LP (IEP), representing approximately 50% more of the portfolio’s value than did Apple, it may not be too surprising that this was a good time to cash in on a very successful 30 month investment in Apple shares.

Shareholders in Icahn Enterprises may wonder when their share of the estimated $4.3 billion in pre-tax cash resulting from the Apple sale will find its way into their pockets.

Good luck with that, unless you’ve got some skin in Icahn Capital Management.

Like Pershing Capital’s profitable exit from Mondelez (MDLZ), sometimes there’s more to a sale than may meet the eye, especially when your portfolio is populated with some very heavy and risky bets that had seen better days.

Not to say that Icahn needed the cash, and he is certainly in a better position this week after some recent strength in some very hard hit energy and commodity related positions.

Icahn is actually in a great position at the moment as others take cover heeding his warning.

With lots of cash and the ability to move markets lower by making bearish comments, as he has been making for the past couple of years, this Chicken Little easily stands to profit from those who heed his warnings.

It’s not exactly like warning everyone to seek shelter at the fire station as the tornado is approaching and then taking the opportunity to ransack people’s homes, but it’s close.

After suffering some significant losses over the past 2 years, it may be time for Icahn to start his ransacking as he looks for those left vulnerable after seeking shelter.

With a quiet week ahead, despite an seemingly unending stream of earnings, I don’t have too much interest getting ahead of Friday’s Employment Situation Report. Neither am I very interested in being part of the test group that discovers that the stock market will finally disassociate itself from energy prices, as the climb in the latter continues.

That doesn’t mean that I’ll be selling, it just means that I may not be all that excited about buying in the coming week.

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

This coming week I have a singular interest and only a handful of stocks that may satisfy that interest.

The interest is in accumulating dividends.

If I had to have a dual mandate for the week it would also be to minimize risk while seeking those dividends.

In addition to Apple, which goes ex-dividend this week, I also have sights set on shares of Intel (INTC) and Starbucks (SBUX).

There’s nothing terribly exciting about Intel at the moment, just as there isn’t anything terribly exciting about anything that’s classified as “old technology.”

As weak as the S&P 500 was last week, those old technology names were even weaker. While I’m no Icahn, sometimes that really is the time to look for advantage, although in the case of another old technology name, Seagate Technology (STX) that is also ex-dividend this week, weakness sometimes only begets more weakness.

I don’t think that will be the case for Intel, which after a strong move higher that started when the market began its February turnaround, has lots of price support below its current level.

Intel shares have traded in a fairly narrow range over the past month and that appeals to me as a possible source of recurring premium income if able to execute serial rollovers while awaiting some appreciation on shares.

Starbucks doesn’t have a terribly exciting dividend, but what it does do very well is to rebound from sharp declines.

It also generally doesn’t take very long for those rebounds to get underway.

Those occasional sharp declines also help to nudge its option premiums higher as there will always be those who are of the belief that declines do beget more declines and the uncertainty that creeps in serves to boost those premiums.

While their coffee makes me exceptionally jittery, I’ve never felt the same about the shares, although I haven’t owned any for a couple of years. I think this may be a good time to consider opening a position and selecting an out of the money strike price in an effort to get the best of all worlds this week.

Finally, Apple.

I find it pretty amazing that in the absence of really any good news for what seems like an eternity for Apple, it’s price hasn’t suffered even more.

That’s faint praise, for sure.

However, ever since the inception of its dividend, purchasing shares just prior to that ex-dividend date, has generally been a good move, if armed with a short term horizon.

What distinguishes this upcoming ex-dividend date is that shares have taken quite a hit in the days immediately preceding that date.

With the exception of Apple’s decline from its 2012 highs, when most everyone was giddy about how it would become a $1000 stock and surpass a $1 trillion market capitalization, those declines have been fairly short lived.

However, on the flip side, in addition to whatever truth may be found in Icahn’s stated concerns, there really hasn’t been any obvious catalyst for Apple other than ever improving sales of its flagship product.

With that phenomenon perhaps on hiatus, one does have to consider that there aren’t too many supports between its current price and about $85.

And then $75.

With that in mind, I still am not ready to run away from the possibility of share ownership.

WWID?

What would Icahn do?

Well, he did it already, just by pushing for the buybacks and the dividends some 30 months ago.

Amid the lack of good news at last week’s earnings was the announcement of a dividend increase and the expectation that share buybacks will continue and be able to provide some price support.

Whether those buybacks in the past few years have been a good use of its cash may forever be open to debate, but while it’s happening, it is definitely a comfort to those in a position of risk.

While those buybacks and declining share price shrink Apple’s market capitalization to a point that it’s now half of that anticipated $1 trillion, I think it is again becoming a good trading vehicle, as opposed to a good investment.

Thank you, Uncle Carl, for having forever changed Apple.

 

 

Traditional Stocks: none

Momentum Stocks: none

Double-Dip Dividend: Apple (5/5 $0.57), Intel (5/4 $0.26), Starbucks (5/3 $0.20)

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 – April 24, 2016

Most of us can recall a time when we were embarrassed, unless you need for denial is a stronger than your memory.

It’s probably much worse when there are a lot of people around as witnesses.

It may be even worse if your antics are under embargo, finally being released at 2 PM, say on a Wednesday, and then really called into question the following day with the planned release of the GDP.

There’s nothing like being under the spotlight, especially when purposefully bringing attention to yourself and then somehow messing up.

I imagine, that even as poised and calm as she appears as the Chairman of the Federal Reserve, a young Janet Yellen may have been as easily subject to embarrassment as a child as any of us.

Obviously, I also imagine that the hairdo hasn’t changed over the years.

Of course, it could be really helpful to know what the actual GDP statistic will be and having your performance altered to meet the demands of reality.

This coming week has an FOMC Statement release which is followed barely 20 hours later by news of the GDP for the first quarter of 2016.

As the FOMC meeting gets underway on Tuesday, there is no doubt awareness of the consensus calling for lackluster GDP growth and the Atlanta Federal Reserve’s own decreased estimate just a few weeks ago.

One would think that with some strong sense of what the data really happens to be, the chances of embarrassing one’s self by taking the opportunity to announce an interest rate increase at this coming week’s FOMC meeting would be very small.

You can avoid embarrassment by never taking chances, although that carries its own cost.

Looking back just a few months to when the FOMC did announce its first interest rate increase in about a decade, there wasn’t much doubt that their intention was to institute a series of rate increases to match the anticipated strength in the economy.

Some 5 months later, imagine the potential for embarrassment when the expected growth had failed to materialize.

But before you come to the belief that a once chastened FOMC would be reluctant to put itself out again, comes the  knowledge that Janet Yellen has “never been allergic to uncertainty.”

It’s refreshing to hear from the leader of the single most important central bank in the history of mankind that there are plenty of things about the economy that the Federal Reserve doesn’t grasp right now.

Refreshing, but maybe also a little bit frightening.

As a federal employee, Janet Yellen doesn’t really get the big bucks, but we generally expect a high degree of certainty from those in charge of large organizations.

While no one seriously expects the announcement of an interest rate increase this coming week, particularly with the belief that the GDP will be weak, some of the revelations about Janet Yellen’s ability to co-exist in a world marked by uncertainty, suggest that she may not be concerned about sacrificing action in the name of avoiding embarrassment.

While the FOMC has been stressing their “data dependence” we may be interpreting that in the wrong way.

We may all think that “data dependence” means that the FOMC will act in a reactive manner, only moving policy when the hand writing is on the wall.

That’s certainly one way to avoid embarrassment, but even a monkey can react to the obvious.

The FOMC needs to be, and likely will be, proactive.

We may not see the handwriting on the wall. because it may just not be there yet other than in the mind’s eye of Janet Yellen.

In hindsight, it may be embarrassing not to have been aware of the signs. However, that may be far less embarrassing than being wrong about trying to be out ahead of the handwriting becoming so obvious.

As much of a shock as an interest rate announcement this week may be, when put into perspective, it won’t rise to the level of asking where were you on that day, as may be asked about JFK, the O.J. Bronco Chase and Prince.

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

If you’ve been paying attention to the market’s response to the first week of earnings reports, it has been clear that companies meeting or exceeding the lowered expectations that had been set the previous quarter were rewarded.

Those that failed to meet lowered expectations or that continued to guide lower for the next quarter were brutally punished.

Microsoft (MSFT) was punished as it failed to meet expectations, but there may have been a literal silver lining in its cloud. That is, while so much focus was placed on some deterioration in certain aspects of its business, sometimes without full consideration of the implications of currency fluctuations, its transition to a cloud based company continues unabated.

Sometimes transition is painful.

In the meantime, Microsoft is, for now, available at a discount. At the same time it offers a reasonable option premium and an upcoming dividend.

With the chance that the discount may disappear when people come to their senses, put together with the premium and opportunity to capture the dividend, I’m looking at a purchase of shares and the sale of a longer dated call option that encompasses the May 17, 2016 ex-dividend date.

While I generally don’t like chasing after stocks that have moved significantly higher, I may re-think that this week as Morgan Stanley (MS) goes ex-dividend.

It’s among stocks that the market hasn’t punished for poor results, as they were at least able to meet expectations. With the financial sector having had a prolonged period of under-performance in 2016 as the realization of increased interest rates hasn’t materialized, it undoubtedly will.

Someday.

I’m ready to believe that day will be much sooner, even if the upcoming GDP may say otherwise. In addition to interest rates, the financial sector stands to greatly benefit if oil prices continue to stabilize and those loans take on a less risky character.

Rather than seeking a true “Double Dip Dividend” trade and selling an in the money call option, I may look at an out of the money strike. However, if looking at an in the money strike and faced with likely early assignment, I would strongly consider trying to roll the short call position over by an additional week or more.

Otherwise, my focus this week is on some high profile and volatile names as they report earnings this week.

Apple (AAPL), Facebook (FB), Twitter (TWTR) and Seagate Technolgy (STX) are just a few among many reporting over the next few days.

The technology sector is one characterized by risk and uncertainty on any given day and especially so when earnings are at hand.

Apple, for all of the uncertainty surrounding the sales of its much awaited watch and the speculation regarding where it may turn to next, is out of the unwanted headlines for the moment, as the immediate need to create a back door into its security system is on hold.

But with the uncertainty, the option market is implying a fairly small move during earnings week, at least by historical standards.

The implied move is only 4.6%, resulting in an anticipated price range of approximately $101 – $111.

There is, however, no chance to derive a 1% ROI for the sale of a weekly put at a strike within that range. For that reason, my only interest in Apple would be in the event of a sharp decline outside of that range following the release of earnings.

In the event that Apple does fall below $101, or approaches that level, I may consider sale of puts. However, there is an upcoming ex-dividend date, perhaps just a week or two later, so I may not want to rollover the short puts if faced with assignment. I may be more inclined to take ownership of shares and then consider strategies to enhance the return by the sale of calls in an effort to also capture the dividend.

Facebook has no dividend. What it does have a greater uncertainty as predicted by the options market. Its implied move is 7.5%, resulting in an anticipated range of approximately $103 – $119.

In the case of Facebook, a 1% ROI for the sale of a weekly out of the money put contract may be obtained at a strike price nearly 8.1% below the mid-way point of the range.

That’s not too much of a cushion, but here too, I might be interested after earnings are released, in the event Facebook takes a rare decline on earnings.

Following a huge run higher after its previous earnings report and a subsequent plunge just a few days later, there are actually numerous support levels down to the lower end of the range predicted by the options market. However, below that lower range there is some room for a further decline and its there that there may be some more reliable price support even as the option market would likely send put premiums sharply higher.

While Apple has no immediate government worries and Facebook has no dividend, Twitter has no soul and no real reason for being, other than for its users.

For investors, that may not be reason enough.

For all of the promise of its overhaul of its management and its Board, not much has happened. As a “logged out user” that Twitter is reportedly targeting for untapped revenue, I don’t think that I’m going to be their answer.

After having enjoyed a very, very busy 2014 selling, rolling over, selling and rolling over Twitter puts repeatedly, I am sitting on a very expensive lot that was assigned to me when I could roll it over no more, other than to an expiration date that was likely beyond my life expectancy.

Talk about being a “logged out user.”

With an implied volatility of 12.2%, Twitter’s anticipated price range this week is $15 – $19. Meanwhile, a 1.2% ROI may possibly be obtained by selling a weekly put option at a strike price 14.7% below the mid-point of that range.

That’s beginning to become a better risk – reward proposition for my temperament. Fortunately, Twitter tends to have some good liquidity in its option trading, in the event that there is an adverse price move and your life expectancy exceeds my own.

Finally, I’m embarrassed to have sold Seagate Technology puts a week ago after it plunged about 18% following a preliminary earnings release. Since then it has plunged almost an additional 10%.

As you might expect, it was that second decline that led to the embarrassment.

I rolled the position over once, but decided to take assignment of shares rather than rolling over again heading into earnings.

If you sell options, you also tend to not be allergic to uncertainty, as it’s the uncertainty that creates the premiums that may be worth pursuing. The accumulation of those premiums can soften the cruelty of being embarrassed and with time it can be possible for everyone to forget the faux pas, especially if your most recent actions reflect redemption.

The option market, however, may be of the belief that you can only make a rock bleed so much, as Seagate Technology’s implied move is only 7.1%. That represents an approximate price range of approximately $24.50 – $27.50.

Here, a 1.2% ROI may potentially be achieved with the sale of a weekly put option 9.5% below the mid-point of that range.

However, with Seagate Technology announcing earnings at the end of the week and with its ex-dividend date likely to be the following week or perhaps the one after, there may be some uncertainty in addition to earnings.

That is, will Seagate Technology be able to continue its very rich dividend as it cut its guidance on weak demand, as it has done periodically over the past decade.

With that in mind, I would probably defer any action until after earnings. If earnings send shares lower, but the dividend is left intact or at least reduced to a still reasonable level, such as 3.5%, I would very much consider the purchase of shares and the sale of calls going into the ex-dividend date.

In doing so, I would still, however, prepare to embarrass myself once again.

Traditional Stocks: Microsoft

Momentum Stocks:   none

Double-Dip Dividend: Morgan Stanley (4/27 $0.15)

Premiums Enhanced by Earnings:  Apple (4/26 PM), Facebook (4/27 PM), Seagate Technology (4/29 AM), Twitter (4/26 PM)

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

Weekend Update – April 17, 2016

I find myself uttering the phrase “Any day now,” more and more, but I know that I’m not alone in doing so.

Over the past few years there have been any number of reasons to believe that whatever predominant theme had the lion’s share of the headlines would soon run its course.

Nothing lasts forever but the earth and sky, so its only reasonable to expect that each passing day brings us closer to the conclusion of whatever current trend we’re mired in. But unlike the prisoner counting the days down, we’re in an open ended system.

The prisoner looks toward a future that he knows, with a great degree of certainty, will come along, pending good behavior. After all, the sentencing judge told him when that day would arrive. On the other hand, those of us who only have the potential to be white collar criminals are reliant on the past repeating itself and we use the past as a guide for forming our expectations.

Lately, that model hasn’t been very good.

Those who have been of the belief that history repeats itself have started taking a long and longer view if they’re still to hold onto their belief that repeating history is inevitable.

For the longest time the refrain was brought up over and over again as we found ourselves waiting for a 10% correction.

As often as had been the case in the few years prior to the latter months of 2015, every time the market was approaching one of its common 5% declines, the chorus rang out warning that it had been far too long since the last 10% decline.

It took years to finally get one and while we waited there was no shortage of those continually reminding us of how overdue we had been.

As one of the minor voices in the choir my own voice grew raspy with the frequency of those warnings.

Then there’s been the matter of oil prices.

While the descent in price seen over the past 2 years isn’t even close to the one seen in 2008, we’ve been crossing off far many more days in the conviction that prices at such depths couldn’t possibly last.

Guess what?

And while we’ve waited for the day to come for oil prices to finally rise, we’ve also spent much of that time in the belief that any day now we would finally witness the expected oil dividend reflected in increased consumer spending.

How’s that working out?

And while you’re waiting for consumers to finally start spending all of their oil related savings, we all know that any day now stocks have to regain their rationality and stop following oil in lockstep. Even with wide agreement that low oil prices are a result of over-production and not diminished demand, stocks continue to take declining oil prices as a threat and rejoice in rising prices.

Maybe next week?

And as this current earnings season gets underway with financials still unable to give positive guidance, for how many quarters have we now been of the belief that corporate top and bottom lines would finally start to show some improvement?

That’s a rhetorical question.

We all know that it’s been far too long.

While thinking that over, who hasn’t been of the belief that interest rates were going to be moving higher any day now?

And to top it off, I’ve been convinced that volatility would be returning any day now, but we all now know that the normal rules and the normal cycles just haven’t been reliable and predictable.

Of course, having been on the wrong side of so many expectations, coming to a realization that past history may be an unreliable partner for the future, may mean only one thing.

We may be coming one day closer to a return to normality and a return to the days when counting down the days was a fruitful pursuit.

I expect that to happen any day now.

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

With earnings season getting ready to enter its second week, I’m a little surprised by how small some of the implied moves in stock price are for the coming week among those reporting earnings. The option market’s expectations for sedate price moves takes away some of the opportunities that I’ve come to look forward to as earnings seasons begin.

Since options pricing reflects uncertainty, among other things, those engaged in that market seem to have much more certainty than I can summon.

With the markets expecting an agreement to cut oil production to be confirmed this weekend, I don’t anticipate any additional uptick in oil dragging stocks higher to start the week.

But, there may be  risk in the other direction if this agreement fails to materialize, as was the case just 2 months ago.

If stocks and oil are still tethered in the coming week, that risk could be spread even to companies that have little at risk to oil, but get taken out or in with the tide.

This week, like last, I still am focused on retail, but am mindful of upcoming earnings. Also, just like last week, there are very few stocks that interest me at the moment.

I expect that to change any day now, but I don’t know if that’s because their prices will be irresistibly low or because the trend higher will be too hard to ignore.

Among those things that I’ve been expecting to happen any day now for the longest time is to finally start hearing retailers report god news and actually giving positive guidance.

My expectation has been wrong, but I continue to believe that the retailers will let us know about any positive change earlier than we’ll learn about it from GDP or any other official measures.

Macy’s (M) doesn’t report earnings until May 11, 2016 and is now trading at a point mid-way between its very recent trading range.

For me, that defines the boundaries in the near term in representing the risk and the reward. I expect that Macy’s will fare better than expected when it does report earnings, perhaps not due to the consumer, but due to charges related to its strategies.

Until that time that earnings are announced, Macy’s is offering a reasonably good option premium for what I believe to be limited downside risk and the potential to achieve an earnings related bounce back in the event of a short term price decline in the intervening weeks.

Bed Bath and Beyond (BBBY) doesn’t report earnings until June 22, 2016 and its recent chart is similar to that of Macy’s. 

Its current price is a bit above the mid-point of its recent range and so it may have some more downside potential than Macy’s, but it, too, is offering an attractive weekly option premium.

That premium is a little bit better for those considering a buy/write, rather than the sale of puts, although the put volume was unusually heavy on Friday, while call volume was fairly light.

Because of the difference in open interest, I may be more inclined to sell puts, in the event that I’m looking for liquidity, if faced with the need for a rollover as the week comes to its end.

Finally, if there’s any retailer that falls into the “any day now” category, it has to be JC Penney.

In JC Penney’s case, “any day now” could just as easily be referring to the day that they disappear or to the day that they finally get some traction.

Like both Macy’s and Bed Bath and Beyond, JC Penney’s stock price is now at about the mid-point of its recent range.

That mid-point, however, represents a large percentage move higher during that time and a subsequent large percentage move lower.

As a result, the weekly option premium is very high, so don’t let the 0.99 Beta fool you. The option market perceives significant uncertainty in where the next move will be and as with Bed Bath and Beyond, the put volume on Friday dwarfed the call volume.

In the case of JC Penney, however, the call option premium is far better than that which can be obtained for the sale of puts and there is sufficient liquidity on the call side to not limit the ability to rollover the short call option position, if necessary.

In the meantime, I know that I’ll also be able to sell calls on existing JC Penney lots that I own, any day now.

Traditional Stocks:   Bed Bath and Beyond, Macy’s

Momentum Stocks:  JC Penney

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 – April 10, 2016

There probably aren’t too many people willing to admit they remember The Osmond’s song “(Just Like A) Yo-Yo.”

The really cool people would look at you with some disdain, as the only thing that could have possibly made the yo-yo tolerable to mention in any conversation was if it was somehow in connection to the song of that title by “The Kinks.” 

With her dovish words just the prior week, Janet Yellen set off another round of market ups and downs that have taken us nowhere, other than to wonder who or what we should believe and then how to behave in response.

That’s been the case all through 2016, as another week of ups and downs have left the S&P 500 just 0.2% higher year to date. Of course, that’s within a 17 month context in which the S&P 500 has had no net movement, but has certainly had lots of ups and lots of downs.

Reminds me of something.

For those that do recall happier times with a yo-yo in hand, you may recall “the sleeper.”

“The Sleeper” was deceiving.

There was lots of energy involved in the phenomenon, but not so obviously apparent, unlike the clear ups and downs of the standard yo-yo move.

Both, though, ended up going nowhere.

“The Sleeper,” though, was quick to respond to a catalyst and return back to the regular pattern of ups and downs or whatever other tricks a yo-yo master could summon.

For now, the market catalyst continues to be oil, as it again demonstrated this week with some large moves in both directions, continuing to trade in magnitude without any obvious regard to fundamentals.

Like “The Sleeper,” markets have snapped in response to oil and even with some recent hints that oil’s hold may be lessening, stocks haven’t been able to break free.

For anyone who ever had a yo-yo string snap, breaking free isn’t necessarily a good thing, especially if stocks decide to finally break free as oil finally decides to break higher. 

While oil still is in control, increasingly, however, we may be seeing the very words of Janet Yellen and the other members of the Federal Reserve act as catalysts. There may be some increasingly divergent views regarding diagnosis and plan of action and less reticence to express those views.

That reminds me of what happened to so many great bands as the individual members sought their own creative paths.

I doubt that Janet Yellen ever purported to be cool. It’s equally unlikely that any of her recent predecessors believed themselves to be so, even as many consider them akin to Rock Gods. As Janet Yellen continues to sport the early 60s “mop-top,” reminiscent of the Fab Four, the belief may have some merit.

For those who do believe that the Federal Reserve Chairman are Rock Gods, they were rewarded this week when their own “Fab Four,” Ben Bernanke, Alan Greenspan, Janet Yellen and Paul Volcker assembled for a round table discussion of the economy.

No great pronouncements came from that historic meeting, as it was unlikely that any of her predecessors would weigh in too much in a manner that could have been considered as a challenge to Yellen’s path.

Still, the market may have used some of Yellen’s comments from that Thursday evening to propel itself strongly higher at Friday’s open, also helped out by oil once again reversing course.

But just as Yellen laid out some confidence, albeit in a non-threatening way, about the FOMC being able to initiate additional interest rate increases in 2016, came word the following morning that the Atlanta Federal Reserve was lowering its GDP forecast.

Understandably, markets may have some difficulty taking such diverging pieces of information and making sense of things.

Where that leaves us is maybe looking toward what has historically mattered.

Earnings.

This week begins another earnings season. After 4 successive quarters of disappointment we’re all primed for some good corporate earnings news.

Top line growth would be especially nice, even if comparative EPS data may not reflect quite as much artificial growth from stock buybacks during the past quarter.

Still, while we wait for Federal Reserve officials to get on a similar page, any signs from corporate earnings that the consumer is again getting involved could be the catalyst that we’ve been long awaiting.

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 opened any new positions in the past 2 weeks as even with continuing price declines I haven’t found a sense of comfort or confidence to part with even a small bit of cash reserves.

With earnings season starting this week, I generally like to see the tone being set by the financial sector, even though their strong showing doesn’t necessarily reflect on the direction of the rest of the market. A poor showing, however, often does.

That financial sector has been battered of late as interest rates remain inconceivably low.

I’m hopeful that expectations are so low that when the big names do report over the next 2 weeks there may be some upside surprise.

However, I’m not willing to place any money on that hope.

Instead, this week I’m more intrigued by some retail names that retreated last week after a period of strength.

Among those are Best Buy (BBY), Coach (COH) and Abercrombie and Fitch (ANF).

If you believe that the consumer is coming back and you’re more inclined to be comforted by Janet Yellen than by the Atlanta Federal Reserve, then retail may be the first place to look.

With those recent losses, I may be more welcome to the notion of considering any of those positions through the sale of put contracts, rather than buy/writes.

While all have good dividends, none are in the immediate future, so that’s one less factor in the equation. With the exception of Coach, which reports earnings at the end of April, the others have an additional month before their own days of reckoning.

Coach, a one time favorite of mine, had long been a consistent performer. That’s not to say that it wasn’t unpredictable when earnings were at hand, but it could reliably be expected to revert to its mean after a large run higher or plunge lower.

That hasn’t been the case for the past few years, although more recently as Coach has been re-emerging from the shadow cast by Michael Kors (KORS) and others, it has started behaving more like the Coach of years past.

You can’t discount the impact of new leadership and strategic direction and Coach has become a far more proactive company and far less likely to take the consumer for granted.

I have a nearly 2 year old position in Coach that has been awaiting that reversion to the mean and have only owned shares on two other occasions in the past 2 years.

With a weekly put premium offering a 1% ROI even if shares fall by 1.2%, based on Friday’s closing prices, and the liquidity offered by the market for Coach puts, I find some soft leathery comfort in considering the sale of those puts and the ability to roll them over in the event of an adverse price movement in the near term.

If faced with that possibility, I would be mindful of the upcoming earnings on April 26, 2016 and if faced with again having to roll the puts over in an effort to avoid assignment of shares, I would look at bypassing the April 29, 2016 options and perhaps considering the following or even a later week and possibly with a lower strike price, as well.

In so many ways Best Buy is the same as Coach.

It too was being written off as irrelevant in the giant shadow of Amazon (AMZN), yet it’s amazing what new leadership and direction can do.

I own a nearly one year old position in Best Buy, and like Coach, have opened and closed 2 new positions since then.

The risk – reward proposition of selling puts in Best Buy isn’t as attractive as it may be for Coach, however, without the immediate challenge of an earnings announcement, there may be some opportunity for serial rollover in the event of an adverse price movement.

The one caveat is that there isn’t very much price support until 28.50, even as shares are down about 12% during the course of the past 4 weeks.

Finally, there was probably a time when if you had ever admitted to either listening to The Osmonds or ever playing with a yo-yo, you would have been banned from any Abercrombie and Fitch store for life.

Being too cool to make some people with discretionary spending power feel disenfranchised from entering your stores was probably not the best of strategic initiatives, but under new leadership a kinder and less smug Abercrombie and Fitch has arrived.

Here too, I have an 18 month old open position, but have had the good opportunity of opening and closing 6 positions since then to help ease the pain just a tiny bit.

With an almost 10% drop in the past week. the risk – reward proposition allows for a 1.2% ROI with the sale of a weekly put option, even if shares fall by 2.1% on the week.

As with the other potential choices for the week, there is some reasonable liquidity in the option market in the event that there is a need for a rollover of the short put position in an effort to escape assignment.

Whether rolling over calls or puts on a serial basis on stocks with high volatility, the net result can be very satisfying, even when the potential angst of unexpected and sudden price movements are factored into the equation.

Sometimes those ups and downs can be your best friend.

 

Traditional Stocks:  none

Momentum Stocks: Abercrombie and Fitch, Best Buy, Coach

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 – April 3, 2016

 I used to love comic books, but I was definitely never in the market for comic books based on great literature, unless a book report was due.

Normally engaged in less high brow reading pursuits, I knew enough to focus on key phrases found in the great works of literature. Those often held the theme and offered insight without having to commit to reading from cover to cover.

Unfortunately, sometimes those phrases from different comic books tended to coalesce and my graded book reports were often characterized by large red question marks.

Lyrics to a song may have no relationship to famous snippets from great works of literature, but this week reminded me of the “Talking Heads” always poignant question that one may find oneself asking:

“Well… How did I get here?”

It was really a week with no real direction, but it was the “Same As It Ever Was” and a perfect ending to the first quarter of 2016, which was truly a tale of two very different markets halves with much ado signifying nothing.

Despite there not being anything really different having occurred from one half of that quarter to the next half your head would have irreparably rolled had you succumbed to the temptation to cut loose, sell and run following the first 6 weeks.

For the Madame DeFarge’s of the world keeping track of some of the decimated hedge funds and their performance, some of their sales in the face of mounting losses in particular positions offered both risk and opportunity to others.

If you stood around on March 31st, as the first quarter of 2016 came to its end and asked the same question as did the Talking Heads, you’d have no answer, unless you drew from upon some of those great literary snippets.

It was truly a tale of two markets with much ado signifying nothing.

With no real catalysts other than the bouncing price of oil, the final week of the quarter got somewhat of a lift from a one time reliable dove who had returned to her roots.

The market’s reaction to the suggestion that the US economy and the world’s economies may not be growing as strongly as anticipated by those having projected a series of interest rate increases in 2016, was clearly an embrace.

The shifting reaction to Friday’s Employment Situation Report was more one of confusion, that even had cable television’s talking heads wondering the same as the viewers.

“Well…. how did I get here?”

Of course, it would also help to know, as the second quarter of 2016 got its start, just where we’re headed next as earnings season begins in just 2 weeks.

If it will truly be same as it ever was, earnings won’t be much of a catalyst as it’s unlikely that the kind of confidence exhibited by Jamie Dimon was widespread in the last quarter.

If it was same as it ever was it would be unlikely to see companies, acting as the stewards of shareholder’s interests, actually doubling down on their buybacks at bargain share prices and doing the only thing that has reliably worked to increase earnings per share.

When you can’t grow earnings, just shrink the number of shares.

And to  really make it same as it ever was, make certain to do that as shares are reaching their highs.

For the rest of us just watching, it may just be that out generation’s great  piece of literature may turn out to be “The Walking Dead.”

I don’t yet know whether there are any great or memorable literary phrases to be found among those pages, such as “It was the best of times, it was the zombiest of times,” but the title is too dangerously close to the reality of 2016.

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

One place where there has not been a tale of two halves has been in the financial sector.

To some degree that’s curious, because many ascribe the turnaround that began on February 11th to the announcement that JP Morgan’s (JPM) Jamie Dimon could no longer resist the bargain price that the shares of his own company represented.

Yet the financial sector has under-performed the S&P 500 both in the first half of the first quarter of 2016 and in its second half, as well.

That’s not to say that the performance of the financial sector in the final 6 weeks of the first quarter was bad, it’s just that Jamie Dimon may have been better served by placing his confidence in a zombie index.

Among those badly battered during the first quarter of 2016, and in fact, in a bear correction, has been Morgan Stanley (MS).

I currently own shares, having also bought shares and surrendered them to assignment on 4 previous occasions in a 1 month period, at the end of 2015.

Contrast that to the lot purchased on January 4, 2016 and you can really see a tale of two stories.

Looking at a 10 Year Treasury Note rate of 1.8%, I don’t think that many talking heads would have predicted that to be the case at the end of the first quarter, except perhaps as an April Fool’s joke.

Unless you believe that interest rates will keep setting one foot deeper and deeper into the grave, there may still be more of a recovery in store for financial sector stocks as the second quarter awaits. 

Seagate Technology (STX) is among a handful of stocks whose obituary has been written over and over again. Not because it is a poorly run company, but because for years the prevailing wisdom has been that storage was no different from a commodity, with every ear of corn being indistinguishable from the next.

As an end user, that may be very true. I don’t particularly care what’s inside the box nor what kind of technology it encompasses, but someone must still care and it can’t all be related to price.

Performance and features must still be part of the equation.

For investors, Seagate Technology may not represent a truly great “investment” any longer, but for traders it has long been a repository of opportunity and excitement.

I generally like to consider Seagate Technolgy in terms of a sale of put options and I especially like its current price. That’s especially the case since its very recent performance a 9% decline in the past 10 days.

Selling puts in the face of such losses usually entails a heightened option premium which offers greater downside protection.

In the past I have enjoyed rolling over those put positions as Seagate Technology often makes large and unexpected moves in either direction. Rolling over allows continuing premiums to accumulate while awaiting price recovery and expiration of the short put position.

The caveat is that Seagate Technology will report earnings in just 3 weeks. In the event that a short position is still open or in jeopardy of being assigned, I would consider rolling the position over to something other than the next weekly expiration date, in order to buy some additional time in the event of an unfavorable price movement.

The heightened premium that comes along with earnings risk may allow that rollover to be accomplished at a lower strike price, as well, offering a bit more of a cushion.

Of course, the other caveat is that a few weeks after earnings, Seagate is expected to be ex-dividend and that dividend is very rich.

It appears to still be marginally sustainable, but with an ex-dividend date coming up, I would rather be in a  position to own shares, get the dividend and have a call option buyer subsidize some of the share price dividend related reduction. That’s certainly preferable to being a put seller and subsidizing a reduced premium in the face of a known drop in share price.

One dividend that isn’t very rich is the one that Whole Foods (WFM) is offering this coming week.

I have not had good success with Whole Foods share ownership over the years, especially if I include the missed opportunities in its early years.

In addition to two uncovered lots that I currently own, previously owned lots have mostly all required more maintenance than they may have been worth, even if having out-performed the S&P 500 during the various holding periods.

Sometimes, that’s not enough.

At the moment, what Whole Foods has going for it is that it is approaching a point at which it has found support. While approaching that point and trading at a long standing mid-point of its price range, shares are offering a respectable option premium while also being ex-dividend this week.

I like that combination, despite not having liked my past experiences.

In the season of redemption, this may be the one that I like the most for the week.

Finally every week brings a reminder of just how imperfect of a science investing in stocks can be.

To some degree a portion of that imperfection has to come from those who are paid to be analytical and quantitative in the pretense that there actually is some sort of science behind what makes stock prices move.

General Motors (GM) announced monthly sales and despite having been higher, they didn’t meet expectations.

That reminded me of something Jamie Dimon said more than a year ago at Davos, when he so cynically and appropriately said that maybe the analysts were wrong in the expectations and that JP Morgan was right on its targets.

Even in science there are expectations of imperfections in theory that result in a need for tolerances. In stock investing when those expectations are realized there isn’t much in the way of tolerance.

However, rather than giving up on the theory behind the science, everyone keeps returning, only to so often be caught in the very same current.

At this price and following this disappointment, I simply like shares of General Motors. Having just lost shares to assignment at a bit more than $1 above Friday’s close, that is the kind of opportunity that a serial buy and write kind of trader longs for even if it represents nothing novel nor exciting.

 

Traditional Stocks: General Motors, Morgan Stanley

Momentum Stocks: Seagate Technology

Double-Dip Dividend: Whole Foods (4/6 $0.13)

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.

All in all, if you think about the man made tragic events of the past week in Brussels, the very rational and calm manner in which world markets reacted was really re-assuring.

When we sometimes scratch our heads wondering whether the market will this time interpret good news as being bad or whether it will deem it good, you know that something is amiss.

It’s nice when clear and rational heads are in charge of things.

So often the way the market seems to react to events it’s not too easy to describe the action as having been rational and you really do have to wonder just who is running the place.

The same may be said for the Federal Reserve and its Governors.

It wasn’t always that way, though.

We always knew who was running the place.

While dictatorships may not be a good thing, sometimes a benevolent dictatorship isn’t the worst of all possible worlds.

There was a time that the individual members of the Federal Reserve and the FOMC kept their thoughts to themselves and knew how to behave in public and in private.

That is, up until about 11 years ago when newly appointed and now departed President of the Dallas Federal Reserve Bank, Richard Fisher, had made a comment regarding FOMC monetary tightening policy and was subsequently taken to the woodshed by Alan Greenspan.

That error in judgment, offering one’s opinion, wasn’t repeated again until the new Federal reserve Chairman, Ben Bernanke, ushered in an era of transparency, openness and the occasional dissenting vote.

At that time, Fisher didn’t even disagree with Federal reserve policy. He was simply giving his opinion on the timing left in an existing policy, or perhaps just disclosing what he knew to be the remaining time of that particular approach.

Still, that kind of behavior was unheard of and not terribly well tolerated.

Now, under Janet Yellen, it seems as if the various Governors are battling with one another over who gets the most air time and who can make the most noise.

Clearly, inmates can be intelligent people, but there may be a very good reason why they’re not running the show.

Why the market often latches onto the words of an FOMC inmate or one who’s not even in that inner circle, particularly when those words may run counter to the Chairman’s own recent words, is every bit of a mystery as why those words were uttered in the first place.

But that is where we seem to be at the moment as the crystal clear clarity that we’ve come to expect from the Federal Reserve is sounding more like the noises coming from the Tower of Babel.

And we all know how that worked out.

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

When there is so much confusion abounding, sometimes it makes some sense to get right back to basics.

There isn’t a much more basic approach to stocks than looking for safe and reliable dividend paying companies, especially when the waters are murky or choppy.

While I don’t disagree with those who point to the out-performance of the universe of dividend paying stocks to the universe of non-dividend paying stocks, I’m not a big fan of the dividend itself and it’s usually fruitless to argue the belief held by many that it is the dividend that makes the company a worthwhile investment that is prone to outperform others.

Ultimately you pay for that dividend by virtue of your share price having gone down the amount of the dividend and you may have to pay taxes as well, on that distribution.

What I do like about dividends is how some of that inherent decline in the share price may end up being subsidized by an option buyer and that can boost the return.

Most of the time, my preference would be to be able to get the premium from having sold the option, most often of weekly duration, and also to be able to collect the dividend.

What i especially like, although it doesn’t happen too often, is when a stock is ex-dividend on a Monday.

In such cases, if the option buyer is going to exercise his right to snatch those shares at a pre-determined price, he must do so no later than the previous Friday.

What I like to do with those Monday ex-dividend positions is to sell an extended weekly option and then I don’t really care too much if those shares get taken away from me early. 

That’s because the additional week’s premium offsets the loss of the dividend while being able to take the cash from the assignment to invest in some other position.

Maybe even an upcoming ex-dividend position.

While not every position that I’m considering in the coming week will be ex-dividend the following Monday, that does characterize most of the potential trades for the coming week.

To put them all of those into a single basket, Cisco (CSCO),  Comcast (CMCSA), Deere (DE) and JP Morgan Chase (JPM) are all ex-dividend next Monday.

They each have their own story to tell and since 2016 has been an incredibly quiet one for me in terms of adding new positions, there is virtually no chance that i will be adding all of them.

At the moment I do own shares of Cisco, but none of the other positions, all representing different sectors.

With everything else being equal, I’d probably be more inclined to consider adding shares to a sector in which I may be under-invested.

For me, that would be the finance sector, which has been embattled all year as the expected interest rate climbs haven’t materialized.

For many, the decision by JM Morgan’s Jamie Dimon to buy $26 million in his own shares was the impetus to turn the market around from its steep 2016 losses.

That turnaround started on February 11, 2016.

Those shares are still far from their 2016 high and sooner or later the inmates trading stocks and the inmates making policy will be right about the direction of interest rates.

I still hold somewhat of a grudge against Comcast when I was a consumer of its services. However, it would be the height of irrationality to ignore it for what it could contribute to my non-viewing or non-internet surfing well-being.

Once a disruptor in its own right, Comcast is working hard to remain at the cutting edge or itself be displaced as the competition and the various means of delivering content are getting more and more complex to understand.

That may be its saving grace.

When you get right down to it, nothing is as simple as having a box, your television and your computer. While there’s decidedly nothing simplistic about what Comcast is doing and where it envisions going, at some point consumers may get overwhelmed by the growth in disparate and unconnected systems and may again long for bringing it all back together under a single roof.

Even if it is and continues to be challenged, Comcast is a few dollars below some resistance and I would feel comfortable adding shares in advance of its ex-dividend date.

I haven’t owned shares of Deere for a long time, just as I haven’t owned shares of caterpillar (CAT). The two of those used to be mainstays of my portfolio, if not both at the same time, then at least alternating, often with a new purchase being initiated as an ex-dividend date was approaching.

What appeals to me about Deere at the moment is that it is a little bit off from its recent highs and only a bit higher than where it stood on February 11th.

But more importantly, this week, as with all of the other potential selections, there is a nice dividend and an equally nice option premium. That combination lends itself to any number of potential contract lengths and strike levels, depending on one’s horizon.

While I especially like the Monday ex-dividend date, this is a position that i might consider wanting to hold for a longer period of time in an effort to either reap additional option premiums or some capital gains from shares, in addition to premiums and the dividend.

While I do already own shares of Cisco and it has bounced back nicely in the past 6 weeks, I think that it, too, has some more upside potential, if only to get it back to some resistance about 5% higher from its current level.

Like most others mentioned this week, there is a generous dividend and a generous option premium that make any consideration worthwhile.

As with Deere, while the Monday ex-dividend date may lead to one specific strategy, there may also be some consideration of utilizing longer dated contracts and further out of the money strike prices in order to capitalize on some anticipated price appreciation.

By contrast, I own shares of both The Gap (GPS) and Dow Chemical (DOW).

There has been absolutely nothing good that has been said about The Gap in far too long of a time.

There was a time that The Gap could be counted upon to alternated its monthly same store sales between worse than expected and better than expected results. as a result The Gap’s shares would frequently bounce back and forth on a monthly basis and it had periodically enhanced option premiums to reflect those consistent moves.

Lately though, the news has always been disappointing and the direction of shares has been unilateral, that is, until February 11th.

There’s not too much of a likelihood that The Gap’s recent performance is related to oil prices or interest rates, but it is certainly long overdue for a sustained move higher.

At its current level, i wouldn’t mind shares staying in the same neighborhood for a while and building some support for another leg. In the meantime, at this level there is some opportunity to collect the dividend and some reasonably health premiums, as well.

Finally, just as last week, I think that there may be opportunity in Dow Chemical.

While it has unjustifiably been held hostage by falling oil prices for more than a year, it has performed admirably. The market reacted positively when the announcement was made of its fairly complex merger and subsequently planned uncoupling with DuPont (DD), although the favor was lost as the rest of the market sank.

I continue to believe that there is relatively little risk associated with shares in the event the proposed merger runs into obstacles, as shares are trading at pre-announcement levels.

That combination of dividends and option premiums keeps making Dow Chemical an appealing consideration even as lunatics may be running around elsewhere.

 

Traditional Stocks: none

Momentum Stocks: none

Double-Dip Dividend: Comcast (4/4 $0.27), CSCO (4/4 $0.26), Deere (3/29 $0.60), DOW (3/29 $0.46), GPS (4/4 $0.23), JPM (4/4 $0.44)

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 – March 20, 2016

Best laid plans often have a way of working out other than expected.

On slow days I make it a point to go and sit in anyone’s waiting room, even without an appointment, just to read stale issues of business and news magazines.

Eventually I get up and leave and feel better about my track record.

Doing that tends to reinforce the belief that the “experts” called upon to predict what awaits in the future are invariably wrong, even as self tying sneakers depicted in “Back to the Future” may now become somewhat of a reality.

Sometimes it’s the timing that’s all wrong and sometimes it’s the concept.

Unless you put much stock in a prediction, such as converting all of your assets to gold in anticipation of yet another Doomsday, they tend to be forgotten unless a dusty magazine is picked up.

The plan to be awash in the one true and universal currency might have seemed like a good idea until coming to the realization that it’s hard to spread on a slice of bread, even if you actually had a slice of bread.

While you can’t be very certain about the accuracy of a “futurists” predictions, you can be very certain that no self-respecting expert on the future keeps a complete scorecard and most would probably be advocates of having physician’s offices regularly rotate their stock of reading materials.

When the FOMC does finally decide to raise interest rates again most will likely have forgotten their earlier prediction of the need for a series of rate hikes. 

Not too long ago the FOMC was predicting a more robust economy for 2016 than has been the case and this past week the members saw things somewhat differently.

To its credit, the FOMC and Chairman Yellen didn’t disown the past, which sometimes, due to revisionism can be just as difficult to discern as the future.

For what seems like the longest time, I have seen a future that has traders finally coming to the belief that a growing economy was good news and the need to continue cheap money policy was bad news.

Conceptually that has to make sense, so I’ll blame poor timing on the poor progress toward changing sentiment.

I’ve also been waiting for the longest time to see lower oil prices prod a consumer based economy toward growth and taking corporate revenues and profits to higher levels.

And I keep waiting for stock prices and oil prices to disassociate from one another during a period that oil prices are more influenced by oversupply and not reduced demand.

The track record on those is pretty abysmal, although for some very brief periods over the past few weeks it looked as if that disassociation might finally be coming.

If your memory can go back far enough, you may remember that as 2015 was coming to its end many were predicting that 2016 would follow the pattern seen in the year following a flat year in markets.

It didn’t take very long for that prediction to itself fall flat.

But what no one would have predicted was that as bad as the first 6 weeks of the year had been, the subsequent 5 weeks would erase the losses and perhaps even serve to rehabilitate the earlier prediction. 

There is little economic news next week other than release of the GDP, which has reflected less impressive than predicted growth of late.

I can confidently predict that it will have no impact on Friday’s stock market close, but I’m not willing to venture as far into the future as the following Monday.

At least I’m capable of learning from my mistakes and am equally confident in predicting that will not always be the case.
 

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

One thing that I would not have predicted was just how shortly following the market’s embrace of the Dow Chemical (DOW) and DuPont (DD) merger deal the price premium would be lost.

With shares trading just above their pre-merger disclosure and having had gone below that level in the early part of 2016, I’ve believed that there was relatively little merger related risk associated with those shares.

I had bought shares twice after the merger announcement and am ready to do so again, particularly as shares have had a somewhat irrational pattern of following the price of oil and now that trend is higher.

With its option premium still reasonably attractive as there is still a perception of either oil or merger related risk, I also have my eyes on its ex-dividend date, which is at the end of the month.

For that reason I would probably look at selling an extended weekly option and if faced with a possible early assignment, I would consider further rolling the option over, if only to get some additional premium to offset the loss of the dividend to the option buyer.

Among the things that many predicted, including myself, was that financial sector stocks would perform nicely as the path for interest rates after the FOMC’s decision at the end of 2015 was going to be higher.

In anticipation that would be the case, I had purchased shares of Morgan Stanley (MS) on 4 occasions in the 2 months leading up to that eventual decision.

That seemed like an easy thing to predict. It was a fifth purchase, that came a few weeks after the announcement that went counter to what seemed predictable.

Instead of interest rates continuing to move higher as any sane seer would have predicted, they went lower and lower, as did most financial sector stocks.

So here we are again with the feeling that now rates can only go higher, but without much confidence in when they will start to happen.

It may be the uncertainty of the latter that makes considering opening a position to be a more predictably rational thing to do.

Last week Williams Companies seemed like a good idea, particularly as there may have been some inefficiencies in its pricing and a divergence between the arbitrage and options communities regarding the prospects of its planned merger.

This week, Marathon Oil (MRO) doesn’t have the same kind of drama figuring into the equation, but along with a battered sector, it may have been price compressed more than most and with the prospects of a larger spring back.

However, even price stability in oil could create an attractive environment for accumulating very generous option premiums.

While those option premiums are attractive, I would probably sacrifice some of the assured premium by selling out of the money strikes in an effort to also capture some capital gains on shares.

As is often the case during periods of high market volatility or individual stock volatility, there may also be advantage in rolling over calls even if faced with assignment as the forward week premiums may be continuing to reflect greater uncertainty.

That was a nice formula in 2008, 2009 and the latter half of 2011 and I wouldn’t mind seeing more of those opportunities appear.

Finally, having purchased eBay (EBAY) a few weeks ago was like re-discovering an old, old friend.

I hadn’t owned shares since the confirmation that eBay was going to spin off the driver of its growth, PayPal (PYPL).  There was probably some luck with having made that first purchase in over a year on the day before the market decided to end the craziness of the first 6 weeks of 2016.

With volatility at its peak for 2016 that was a good time to consider buying just about anything, if only you could have predicted what was in store in the subsequent 5 weeks.

I couldn’t, but at the same time I couldn’t resist the lure of eBay shares. Despite having climbed 5% since then, that performance pales in comparison to the S&P 500 which was nearly 10% higher during that time span.

What eBay is continuing to offer, even as volatility has started returning to the levels it had languished for up until the past 6 months, is an attractive option premium.

The reason I had found myself having purchased shares of eBay on 25 occasions during a 4 year period, despite not having owned any shares for more than a year of that time span, is that it tended to trade in a tight range, but due to occasional surges or plunges, offered a very attractive premium.

They say that you can’t go back home, but predictably you do and sometimes it works out.

Traditional Stocks:  Dow Chemical, eBay, Morgan Stanley

Momentum Stocks:  Marathon Oil

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 – March 6, 2016

Depending upon what kind of outlook you have in life, the word “limbo” can conjure up two very different pictures.

For some it can represent a theologically defined place of temporary internment for those sinners for whom redemption was still possible. 

In simple terms it may be thought of as a place between the punishing heat and torment of hell below and the divineness and comfort of heaven above.

Others may just see an image reminding them of a fun filled Caribbean night watching a limber individual dancing underneath and maybe dangerously close to a flaming bar that just keeps getting set lower and lower.

Both definitions of “limbo” require some significant balancing to get it just right.

For example, you don’t get entrance into the theologically defined “Limbo” if the preponderance of your sins are so grievous that you can’t find yourself having died in “the friendship of God.” Instead of hanging around and waiting for redemption, you get a one way ticket straight to the bottom floor.

It may take a certain balance of the quantity and quality of both the good and the bad acts that one has committed during their mortal period to determine whether they can ever have a chance to move forward and upward to approach the pearly gates of heaven.

If you’ve ever watched a limbo dancer, you know that it’s more than just the ability to flex a spinal cord. There’s also the balance that has to be maintained while somehow still moving forward and downward.

One limbo makes you strive to move you to a higher plane and the other strives to make you move to a lower plane.

Why they’re called the same thing confuses me.

After this week’s surprisingly high Employment Situation Report that was coupled with an unexpected lower average wage, the data that the FOMC finds itself analyzing seems itself to be getting more and more confusing to mere mortals.

At the same time more and more people are craving for some pronouncement of clarity.

Along with that confusion comes a need for the FOMC to balance the relative importance and meanings of the individual bits of data coming in and trying to understand what it all means going forward, if you accept that their decisions are data driven.

And, of course, there can’t be a reason to suspect that the decisions made will be anything but data driven. It’s just that there’s no data that assesses the interpretation of those economic data points and to explain why there may be widely differing opinions among the FOMC’s highly capable analysts.

Of course, there will be no shortage of critics ready to excoriate the decision makers for whatever decision they reach. However, if the FOMC members ever feel the heat they certainly do a good job of hiding that fact.

For now, markets continue to follow oil, including during its intra-day reversals and as long as oil continues to move higher, that’s a good thing.

With a nearly 10% increase this past week in oil, stocks had another great week, especially if you were holding any number of a long beleaguered series of stocks.

But as the week is set to begin, with very little of economic news scheduled and no fundamental change in anything, we’re left in limbo as we await the FOMC’s decision the following week.

Whether to continue the 3 week rally or to take profits is going to be anyone’s guess, but there’s no doubt that oil will some day be redeemed.

Not as certain is whether the stock market will come to realize that it is the reason behind prevailing oil prices and not the prices themselves that should determine whether the stock market is worthy of redemption, as well.

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

Unlike Chesapeake Energy (CHK) and Cliffs Natural Resources (CLF), many of the week’s extraordinarily performing stocks didn’t take the death of a founder or hedge fund activist to propel them forward, although it did seem as if the market placed a high multiple on death.

Having long suffered through the ownership of far too many commodity related stocks I was happy to see death and non-death related companies move higher, but still have no reason to believe that they are anywhere but remaining in limbo, with their own redemptions still being but a dream.

General Motors (GM) emerged from limbo during the throes of the financial crisis and under new leadership has weathered some difficult issues that could have been far more ruinous in an earlier time.

Like so many stocks over the past few weeks its shares have shown recovery and I believe that there is more ahead being propelled by fundamental factors. With shares being ex-dividend this week it looks like a good time to consider adding shares and selling either a weekly near the money contract or considering adding an additional week if the strike price is in the money.

In the latter case, using the slightly longer term contract would offset the loss of the dividend in the event shares are assigned early.

In a perfect example of how the herd is wrong, while we were all awaiting a rise in interest rates since the FOMC raised rates more than 3 months ago, all of those recommendations based on a rising interest rate environment were ill advised.

You know that if you owned shares of most anything in the financial sector.

I know that I know that to be the case, but I think we now may be in store for some sustained interest rate increases in the 10 Year Treasury and should see more strength being reflected in the financial sector.

One of my favorites in the event that those rates do finally resist making everyone look foolish again is MetLife (MET).

Even after having made up some lost ground over the past 3 weeks it still has more upside following a gap lower after its most recent earnings report.

While it has an admirable dividend as well, it tends to be associated with its earnings report date, which is still 2 months away. I would consider a purchase of shares and the sale of short term call contracts, further considering rolling over those contracts if assignment is likely at a price near the strike level.

It wasn’t so long ago that Seagate Technology (STX) may as well have given up. When storage was being talked about as being a commodity, most had written it off as irrelevant for anyone’s portfolio.

When a product becomes a mere commodity the conventional wisdom is that the stock becomes dead money, but it has been hard to characterize Seagate Technology as having anything but life.

Sometimes that existence has been fairly erratic as it is prone to sharp moves higher and lower, often both in narrow time frames.

That gives options an attractive premium, reflecting the enhanced volatility.

Seagate Technology is a stock that I prefer to consider through the sale of out of the money puts and am often happy rolling those puts over in an attempt to avoid being assigned shares.

With its ex-dividend date is still 2 months away, I wouldn’t mind the opportunity to do so on a serial basis and accumulating those premiums in the process. If still faced with assignment in the week leading up to that ex-dividend date I would take assignment in an effort to then grab the dividend.

The caveat is that Seagate Technology’s dividend is unsustainably high. Seagate, during its existence as a publicly traded company did briefly reduce and then suspend its dividend for nearly 2 years, beginning at the depth of the market’s 2009 meltdown. but has been consistently raising it since the resumption.

It may be time for either a respite or some killer earnings. If selling puts I would prefer the latter.

I also like the idea of selling puts into price weakness. In the event that Dow Chemical (DOW) shows some weakness as the week gets ready to begin, I may consider the sale of put options.

What may put some pressure on Dow Chemical is the news that broke after the closing bell on Friday that DuPont (DD), well along the way toward its complex merger with Dow Chemical, may have another suitor with very, very deep pockets.

That suitor is reported to be BASF SE (BASFY) the Germany based chemical company, who may have to dig extra deep due to the Euro insisting that it make its way toward parity with the US Dollar.

For its part, Dow Chemical may be forced to dig deeper to complete the deal, but the after hours trading actually saw some increase in Dow Chemical’s share price, as well, perhaps reflecting the perceived value of the Dow Chemical and DuPont merger, which may be too afar along to be disrupted by something other than regulators.

Finally, while commodities led the week higher, the advance was broad. However, in the “No Stock Left Behind” march higher during the late half of February and beginning of March are some pharmaceutical names.

Pfizer (PFE), while not the poorest of a cohort of under-performers over the past 3 weeks while the market has been working hard to erase 2016’s losses, was at the bottom of the heap this past week.

While it still has a big unresolved issue ahead of it with regard to its strategy to escape significant US tax liability by merging with Ireland based Allergan (AGN), it has long ceded the premium that investors had given it when the news of the proposal first broke.

While there is no assurance that Pfizer and Allergan will receive regulatory approval, while the proposal itself is in limbo, there continues to be opportunity to utilize Pfizer as a vehicle to generate option premiums.

With its healthy dividend, a long sojourn in limbo could be propitious for option writers, particularly if there is little downside risk associated with the merger being blocked.

 
Traditional Stocks: Dow Chemical, MetLife, Pfizer

Momentum Stocks: Seagate Technology

Double-Dip Dividend: General Motors (3/9 $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 – February 28, 2016

It is really amazing that as big as the United States’ economy is, everything may now simply be part of a very delicate balancing act.

“Momentum” is a simple concept in classical mechanics and is generally expressed as the product of the mass of an object and its velocity.

The term “momentum” is often used when describing stocks, but many described as having momentum can be easily pushed off their track.

Another simple concept and part of classical physics, is that of “inertia.” Inertia is the resistance of any physical object to any change in its state of motion.

When a “momentum stock” has a relatively low market capitalization it isn’t too hard for resistance to match and overcome that momentum.

Greed and fear may play roles, too, in such cases, but those aren’t terms that Isaac Newton used very often.

The US economy may often move at what seems like a glacial speed, but its easy to overlook how difficult it is to alter its path due to its huge size.

That’s what makes the job of the FOMC so difficult. 

Outcomes resulting from their actions may take a long, long time to become obvious. Sometimes the FOMC acts to increase momentum and sometimes they have to act to increase resistance.

Stock market investors prefer the former, but history suggests that the early stages of the latter may be a great time for optimism.

While both momentum and inertia may be simple concepts, when considered together that’s not so much the case. Fortunately for the FOMC, the “Irresistible Force Paradox” suggests that there can be no such thing as an unstoppable object or an irresistible force.

Something has to give over the course of time.

While I’m no apologist for the George Bush presidency, the seeds for the beginning of an improvement in the economy often cited as beginning in about February 2009 could only have been sown much earlier. Similarly the economic stress in early 2001 could only have had its roots quite a bit earlier. However, our minds make temporal associations and credit or blame is often laid at the feet of the one lucky or unlucky enough to be in charge at the time something becomes obvious.

We’re now facing two delicate balances.

The first is the one continually faced by the FOMC, but that has been on most everyone’s mind ever since Janet Yellen became Chairman of the Federal Reserve.

The balance between managing inflation and not stifling economic growth has certainly been on the minds of investors. Cursed by that habit of making temporal associations, the small interest rate hike at the end of 2015, which was feared by many, could be pointed to as having set the stage for the market’s 2016 correction.

That leaves the FOMC to ponder its next step. 

While stressing that its decisions are “data driven” they can’t be completely dismissive of events around them, just as they briefly made mention of some global economic instability a few months ago, widely believed to have been related to China.

This past week’s GDP sent mixed messages regarding the critical role of the consumer, even as the previous week showed an increase in the Consumer Price Index. Whether rising health care costs or rising rents, which were at the core of the Consumer Price Index increase could hardly be interpreted as representing consumer participation, the thought that comes to mind is that if you’re a hammer everything looks like a nail.

The FOMC has to balance the data and its meaning with whatever biases each voting member may have. At the same time investors have to balance their fear of rising rates with the realization that could be reflecting an economy poised to grow and perhaps to do so in an orderly way.

But there’s another delicate balance at hand.

While we’ve all been watching how oil prices have whipsawed the stock market, there’s been the disconnect between lower oil prices borne out of excess supply and stock market health.

For those pleased to see energy prices moving higher because the market has gone in the same direction, there has to be a realization that there will be a point that what is perceived as good news will finally be recognized as being something else.

It’s hard to imagine that a continuing rise in oil will continue to be received as something positive by investors. Hopefully, though, that realization will be slow in coming. Otherwise, we face having had the worst of all worlds. Stocks declining as oil declined and then stocks declining as oil moves higher.

Now that JP Morgan Chase (JPM) has let everyone know just how on the hook it may be on its oil loan portfolio, it’s becoming more and more clear why the market is following in the same direction as oil has gone.

If the price of oil goes too low there may be drains on the banking system if there are defaults on those loans. We could again be hearing the phrase “too big to fail,” although this time instead of over-leveraged individuals losing their homes, all of the beneficiaries from the US oil boom could be at risk.

Of course, if oil goes too high and does so without being fundamentally driven, it can put a damper on a consumer driven economy that isn’t looking very robust to start.

We’re just 3 weeks away from the next FOMC Statement release and Chairman Yellen’s press conference may tip some balances. For much of the past two weeks the stock market has been celebrating higher oil and data suggesting no immediately forthcoming interest rate increase.

Of course, the FOMC may have its own irresistible force at play, perhaps explaining the earlier interest rate hike which didn’t seem to be supported by economic data. That force may be. a pre-determined intention to see rates rise

The market is of the belief that oil price momentum higher won’t meet its match in the negating force of increased interest rates, but one person may hold the balance in her hands.

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

Speaking of momentum and being easily thrown of track, Cypress Semiconductor (CY) comes to mind.

It trades at a high beta and is prone to volatile moves in either direction. It’s most recent direction has been lower, after having spiked sharply higher on news of its proposed buyout of another company.

When they were stranded at the alter by another suitor shares started a sharp descent from which it may finally be ready to emerge.

With a market capitalization of less than $3 billion it was easily knocked off track, but could just as easily get back on.

With an ex-dividend date in the April 2016 option cycle and with earnings in the May 2016 option cycle, I’m likely to add shares this coming week and will probably sell the April 2016 options while doing so.

I do have some concern about the company being able to continue its dividend, but IU don’t imagine that most who are invested in Cypress Semiconductor are doing it for the dividend, so I don’t believe that would represent significant downside pressure.

While February’s nice turnaround has left the S&P 500 significantly less in the hole for 2016. the financial sector has been continuing to have a difficult time as expectations for rising interest rates have proved premature.

American International Group (AIG) is near a 52 week low, but it hasn’t been the worst of that group even as it approaches a 20% correction for 2016.

What the downward pressure in the financial sector has brought has been enhanced option premiums. With a now respectable dividend as part of the equation and an ex-dividend the following week, I would consider selling something other than a weekly option

Abercrombie and Fitch (ANF) is on a roll of late and has earnings announced this week. It has a habit of being explosive when it does announce earnings and also has a habit of quickly giving back gains from news perceived as being positive. However, it has not given back the gains since its gap higher in November 2015.

What may make consideration of Abercrombie interesting this week is that it is also ex-dividend on the same day as earnings are announced.

While I normally consider the sale of puts before or after earnings, the combination of earnings, an ex-dividend date and a 13.3% implied price move has me thinking a bit differently.

I’m thinking of buying shares and then selling deep in the money calls.

Based on Friday’s closing price of $28.50, the sale of a weekly $25 strike call option at a premium of $4 would result in an ROI of 1.8% if assigned early in order to capture the dividend.

Since the ex-dividend date is March 2nd, that early assignment would have to come on Tuesday, March 1st and would preclude earnings exposure.

If, however, early assignment does not occur, the potential ROI for a full week of holding could be 2.5%, but with earnings risk. The $25 strike price is within the lower boundary implied by the option market, so one has to be prepared for a price move that may require further action.

Weyerhauser (WY) is also ex-dividend this week and its 2016 YTD loss is nearly 15%. The consensus among analysts, who are so often very late to react to good or bad news, are solidly bullish on shares at these levels.

With its merger with Plum Creek Timber now complete, many expect significant cost savings and operational synergies. 

It’s dividend isn’t quite as high and its payout ratio is almost half that of Cypress Semiconductor, but still far too high to be sustained. REIT or no REIT, paying out more than 100% of your earnings may feel good for a while if you’re on the receiving end, but is only a formula for Ponzi schemers of “The Producers.”

For now, that doesn’t concern me, but with an eye toward the upcoming ex-dividend date, which is on a Friday, I would consider selling an extended weekly option and then wouldn’t mind terribly if the options were exercised early.

Finally, I’m not one to be very interested in getting in on a stock following a climb higher, nor am I one to spend too much time reading charts.

But Coach (COH) which is ex-dividend this week gives me some reason to be interested.

A one-time favorite of mine either right before an ex-dividend date or following a large earnings related price decline, I’ve been holding onto an uncovered lot of shares for quite some time. Only the dividend has made it tolerable.

Ordinarily, I wouldn’t be terribly interested in considering adding shares of Coach following a 16% climb in the past month. However, shares are now making their second run at resistance and there is an 11% gap higher if it can successfully test that resistance.

It has been a prolonged drought for Coach as it was completely made irrelevant by Kors (KORS) for quite some time. During that time Kors had momentum and was also perceived as the force to stop Coach.

Time and tastes can change lots of things. That’s another delicate balance and for now, the balance seems to be back on the side of Coach.

Traditional Stocks: American International Group

Momentum Stocks: Cypress Semiconductor

Double-Dip Dividend: Coach (3/2 $0.34), Weyerhauser (3/4 $0.31)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/2 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 – February 21, 2016

 If you can remember as far back at the 1970s and even the early part of the 1980s, it still has to be hard to understand how we could possibly live in a world where we would want to see inflation.

It’s hard to think that what we thought was bad could actually sometimes be good medicine.

But when you start thinking about the “lost decades” in Japan, it becomes clear that there may be a downside to a very prolonged period of low interest rates.

Sometimes you just have to swallow a bitter pill.

And then, of course, we’re all trying to wrap our minds around the concept of negative interest rates. What a great deal when bank depositors not only get to fund bank profits by providing the capital that can be loaned out at a higher rate of interest than is being received on those deposits, but then also get to pay banks for allowing them to lend out their money.

For savers, that could mean even more bad medicine in order to make the economy more healthy, by theoretically creating more incentive for banks to increase their lending activity.

From a saver’s perspective one dose of bad medicine could have you faced with negative interest rates in the hope that it spurs the kind of economic growth that will lead to inflation, which always outpaces the interest rates received on savings.

That is one big bitter pill.

While the Federal Reserve has had a goal of raising interest rates to what would still be a very reasonable level, given historical standards, the stock market hasn’t been entirely receptive to that notion. The belief that ultra-low interest rates have helped to spur stock investing, particularly as an alternative to fixed income securities makes it hard to accept that higher interest rates might be good for the economy, especially if your personal economy is entirely wrapped up in the health of your stocks.

In reality, it’s a good economy that typically dictates a rise in interest rates and not the other way around.

That may be what has led to some consternation as the recent increase in interest rates hasn’t appeared to actually be tied to overt economic growth, despite the repeated claims that the FOMC’s decisions would be data driven.

Oil continued to play an important role in stock prices last week and was a good example of how actions can sometimes precede rational thought, as oil prices surged on the news of an OPEC agreement to reduce production. The fact that neither Iran nor Venezuela agreed to that reduction should have been a red flag arguing against the price increase, but eventually rational thought caught up with thought free reflexes.

While oil continued to play an important role in stock prices, there may have been more to account for the recovery that has now seen February almost completely wipe out it’s  2016 DJIA loss of  5.6%.

What may have also helped is the belief, some of which came from the FOMC minutes, that the strategy that many thought would call for small, but regular interest rate increases through 2016 may have become less likely.

The stock market looked at any reason for an increase in interest rates as being bad medicine. So it may not have been too surprising that the 795 point three day rise in the DJIA came to an abrupt stop with Fridays release of the Consumer Price Index (“CPI”) which may provide the FOMC with the data to justify another interest rate increase.

Bad medicine, for sure to stock investors.

But the news contained within the CPI may be an extra dose of bad medicine, as the increase in the CPI came predominantly from increases in rents and healthcare costs.

How exactly do either of those reflect an economy chugging forward?

That may be on the mind of markets as the coming week awaits, but it may be the kind of second thought that can get the market back on track to continue moving higher, similar to the second thoughts that restored some rational action in oil markets last week.

You might believe that a rational FOMC wouldn’t increase interest rates based upon rents and healthcare costs if there is scant other data suggesting a heating up of the economy, particularly the consumer driven portion of the economy.

While rents may have some consumer driven portion, it’s hard to say the same about healthcare costs.

Ultimately, the rational thing to do is to take your medicine, but only if you’re sick and it’s the right medicine.

If the economy is sick, the right medicine doesn’t seem to be an increase in interest rates. But if the economy isn’t sick, maybe we just need to start thinking of increasing interest rates as the vitamins necessary to help our system operate more optimally.

Hold your nose or follow the song’s suggestion and take a spoonful of sugar, but sooner or later that medicine has to be taken and swallowed.

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

It’s not so easy to understand why General Motors (GM) is languishing so much these days.

As bad as the S&P 500 has been over the past 3 months, General Motors has been in bear territory, despite continuing good sales news.

What has been especially impressive about General Motors over the past few years is how under its new leadership its hasn’t succumbed or caved in as legal issues and potentially very damaging safety related stories were coming in a steady stream.

I already own some shares of General Motors, but as its ex-dividend date is approaching in the next few weeks, I’m considering adding shares, but rather than selling weekly options, would be more inclined to sell the monthly March 2016 option in an effort to pocket a more substantial premium, the generous dividend and perhaps some capital gains in those shares.

I wrote about Best Buy (BBY) last week and a potential strategy to employ as both earnings and its ex-dividend date were upcoming.

This week is the earnings event, but the ex-dividend date has yet to be announced.

The strategy, however, remains the same and still appears to have an opportunity to be employed.

With an implied move of 8% next week, there may be an opportunity to achieve a weekly 1% ROI by selling put options at a strike 10% below Friday’s closing price.

The risk is that Best Buy has had earnings related moves in the past that have surprised the seers in the options market. However, if faced with assignment, with one eye fixed on any upcoming announcement of its ex-dividend date, one can either seek to rollover those puts or take ownership of shares in order to secure its dividend and subsequently some call options, as well.

Alternatively, if a little risk adverse, one can also consider the sale of puts after earnings, in the event that shares slide.

Also mentioned last week and seemingly still an opportunity is Sinclair Broadcasting (SBGI). It, too, announces earnings this week and has yet to announce its upcoming ex-dividend date.

Its share price was buoyed last week as the broader market went higher, but then finished the week up only slightly for the week.

Since the company only has monthly option contracts available, I would look at any share purchase in terms of a longer term approach, in the event that shares do go lower after earnings are announced.

Sinclair Broadcasting’s recent history is that of its shares not staying lower for very long, so the use of a longer term contract at a strike envisioning some capital appreciation of shares could give a very satisfactory return, with relatively little angst. As a reminder, Sinclair Broadcasting isn’t terribly sensitive to oil prices or currency fluctuations and can only benefit from a continued low interest rate environment.

It’s hard now to keep track of just how long the Herbalife (HLF) saga has been going on. My last lot of shares was assigned 6 months ago at $58 and I felt relieved to have gotten out of the position, thinking that some legal or regulatory decision was bound to be coming shortly.

And now here we are and the story continues, except that you don’t hear or read quite as much about it these days. Even the most prolific of Herbalife-centric writers on Seeking Alpha have withdrawn, particularly those who have long held long belief in the demise of the company.

For those having paid attention, rumors of the demise of the company had been greatly exaggerated over the past few years.

While that demise, or at least crippling blow to its business model may still yet come to be a reality, Herbalife reports earnings this week and I am once again considering the sale of put options.

With an implied move of 14.3%, based upon Friday’s closing the price, the options market believes that the lower floor on the stock’s price will be about $41.75.

A 1.4% ROI on the sale of a weekly option may possibly be obtained at a strike price that is 20.4% below Friday’s close.

For me, that seems to be a pretty fair risk – reward proposition, but the risk can’t be ignored.

Since Herbalife no longer offers a dividend, if faced with the possibility of share ownership, I would try to rollover the puts as long as possible to avoid taking possession of shares.

While doing so, I would both hold my breath and cross my fingers.

Finally, as far as stocks go, Corning (GLW) has had a good year, at least in relative terms. It’s actually about 1.5% higher, which leaves both the DJIA and S&P 500 behind in the dust.

Shares are ex-dividend this week and I’m reminded that I haven’t owned those shares in more than 5 years, even as it used to be one of my favorites.

With its recently reported earnings exceeding expectations and with the company reportedly on track with its strategic vision, despite declining LCD glass prices, it is offering an attractive enough premium to even gladly accept early assignment in a call buyer’s attempt to capture the dividend.

With the ex-dividend date on Tuesday, an early assignment would mean that the entire premium would reflect only a single day of share ownership and the opportunity to deploy the ensuing funds from the assignment into another position.

However, even if not assigned early, the premiums for the weekly options may make this a good position to consider rolling over on a serial basis if that opportunity presents itself.

Those kind of recurring income streams can offset a lot of bitterness.

Traditional Stocks:  General Motors

Momentum Stocks: none

Double-Dip Dividend:   Corning (2/23 $0.135)

Premiums Enhanced by Earnings:   BBY (2/25 AM), Herbalife (2/26 PM, Sinclair Broadcasting (2/24 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 – February 14, 2016

It’s not only campaigns that are going negative.

After having watched the latest in political debates on both sides of the aisle, the negative finally coming to the surface should no longer come as a surprise.

Maybe the real surprise should have been just how long the professional politicians on both sides were able to keep that negativity mostly bottled up.

There’s certainly nothing illegal about engaging in a negative political campaign and we have heard time and time again that politicians pursue that unsavory strategy because it works.

It’s also a strategy that’s not unique to the United States. The last unicorn was apparently spotted in Canada and ex-Prime Minister of Great Britain, Tony Blair, was frequently called “Tony Bliar.”

Maybe the fact that such an approach works is why central banks around the world are increasingly giving some thought to going negative.

Negative interest rates are now all the rage after the Bank of Japan had already gone in that direction a few weeks ago.

This week there was at least some suggestion that particular strategy wasn’t entirely off the table in the United States as some are beginning to question just what arrows the Federal Reserve has left in its quiver in the event of an economic slowdown.

Janet Yellen, during her two day mandated session in front of Congressional committees this week said that she didn’t even know whether the Federal Reserve had the legal authority to implement negative interest rates in the United States, but that didn’t stop the worries over what such a scenario would mean with regard to the economy that drove it there.

While oil continued to be the major stock market mover for 2016, this week had some diversification as precious metals began to soar and interest rates continued to plunge.

Who would have predicted this just a couple of months ago when the FOMC saw it fit to begin a slow increase in interest rates?

But just as the week was looking as if it would create a February 2016 that would have us pining for the good old days of January 2016, oil rebounded and Jamie Dimon came to the rescue with a $26 million expression of confidence in the banking system.

Even in the economy of Djibouti, $26 million isn’t that big of a deal, but when Dimon elected to purchase shares in the open market for only the 3rd time in his tenure at JP Morgan Chase, it may have been the first vote of confidence in anything in 2016.

Fortunately, we have a holiday shortened trading week ahead to help us digest the gains seen on Friday that left the S&P 500 only 0.9% lower on the week.

While we’ve had a recent run of strong week ending trading sessions, there hasn’t been much in the way of staying power. Maybe a long weekend will help.

What the day off will also do is to give us a chance to actually try to understand the significance of negative interest rates even as the market seemed concerned just a couple of days earlier that a March 2016 interest rate hike wasn’t off the table.

Last week’s reactions by the market to interest rates was akin to being both afraid of the dark and the light as the market understandably went back and forth in spasms of fear and relief.

Going negative usually reflects some sort of fear and a concern that more conventional approaches aren’t going to deliver the hoped for results.

It may also reflect some desperation as there comes a perception that there is nothing really to lose.

I can understand a Presidential candidate using a profanity during a public appearance and I can even understand one Presidential candidate referring to another as “a jerk.”

That kind of negativity I get, but I’m having a really hard time understanding the concept of negative interest rates.

While I understand relative negative rates during periods of high inflation, the very idea that paying to keep your money in the bank would become similar to paying someone to store your cache of gold bars is confusing to me.

Why would you do that? Why would I want to pay money to a bank just so they could make even more money by putting my money to use?

I know that it’s not quite that simple, but I would be happy if I could get a bank to lend money to me at a negative interest rate, but somehow I don’t envision the APR on credit cards reflecting that kind of environment anytime soon.

Now, if you really wanted to spur consumer spending, that may be just the way to do it. Why not apply a monthly negative interest rate to a credit card balance and the longer you keep the balance open the more likely it will disappear as the negative interest accumulates and works down your debt.

The money you don’t spend on your monthly payments could easily then be used to spur even more consumer spending.

If that isn’t a win – win, then I just don’t know what would be.

I suppose I understand the theory behind how negative interest rates may prompt banks, such as Dimon’s JP Morgan Chase (JPM) to put deposits to work by increasing their lending activity, but I wonder how the lending risk is managed as thoughts of recession are coming to the surface.

As I recall, it wasn’t that long ago that poor management of lending risk put us all at risk.

The coming week will have the release of some FOMC meeting minutes and we may get to see whether there was even the slightest consideration given to going negative.

It’s not too likely that will have come up, but as we may now be witnessing, it is possible that the FOMC’s crystal ball is no better than those owned by the least informed of us.

What was clear, however, as the market began to sink back to a “bad news is good news” kind of mentality is that negative rates weren’t the kind of bad news that anyone could embrace.

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

Among many stocks that fared well on Friday as the market found a reason to mount some rebound from the onslaught earlier in the week was Best Buy (BBY).

Best Buy’s performance was especially impressive as it opened the day 6% lower following a downgrade, they ended the day more than 1% higher.

I generally don’t want to add positions after a sharp climb higher, but as Best Buy is set to report earnings during the first week of the March 2016 option cycle, I am willing to consider the sale of puts in the week prior to those earnings, as the recent volatility has its rewards reflected in the available premiums.

If faced with assignment the premiums are enhanced due to earnings and there may be good opportunity to roll the short put position over, although if doing so, some thought has to be given to the upcoming ex-dividend date likely sometime before the beginning of the April 2016 option cycle.

If faced with assignment of shares just prior to that ex-dividend date, I’d be inclined to accept that assignment in order to have both the chance to sell calls and to possibly collect the dividend, as well.

While its options are less liquid than those of Best Buy, I would consider doing the same with Weyerhauser (WY), although earnings don’t have to be contended with until the May 2016 option cycle.

With an upcoming merger expected to close sometime in the first or second quarters of 2016, Weyerhauser has badly trailed the S&P 500 since the announcement was made 3 months ago.

That is despite the belief by many that the proposed merger with Plum Creek Timber (PCL) represents a good strategic fit and offers immediate financial synergy.

At this point, I just like the low price, the relatively high option premium and the potential to take ownership of shares in order to also try and collect the generous dividend just a few weeks away.

Due to the lesser liquidity of the options, there can also be some consideration to simply doing a buy/write and perhaps selecting an out of the money strike price with an expiration after the ex-dividend date.

Sinclair Broadcasting (SBGI) is another that hasn’t fared terribly well in the past few months and has also under-performed the S&P 500 of late.

It is a stock that I often purchase right before an ex-dividend date, as long as its price is reasonable by its historical standards.

For me, that reasonable price is around $29. It failed to break through resistance at $33 and has fallen about 18% in February, bringing the price to where I like to consider entry.

Share price hasn’t been helped by a recent downgrade on earnings warnings and the announced buyout of The Tennis Channel.

In the meantime, Sinclair Broadcasting remains the most potent play in local television in the nation and is increasingly diversifying its assets.

With earnings and an ex-dividend date both due early in the March 2016 option cycle and with only monthly options available, this is a position that I would consider selling longer term and out of the money contracts upon, such as the $30 June 2016 contract.

Sinclair Broadcasting’s stock price history suggests that it tends not to stay depressed for more than a couple of months after having approached a near term low. Hopefully, it’s current level is that near term low, but by using a June 2016 option expiration there may be sufficient time to ride out any further decline.

Following an even stronger gain than the S&P 500’s 1.9% advance to close the week, General Electric (GE) is now almost even with the S&P 500 for 2016.

That’s not a great selling point.

General Electric seems to have just successfully tested an important support level, but that risk does remain, particularly if the overall market takes another leg down.

In that case, there may be some significant risk, as there could be another 15% downside in an effort to find some support.

Thus far, the moves in 2016 have been fairly violent, both lower and higher, with an overall net downward bias. There isn’t too much reason to believe that pattern will soon reverse itself and for that reason option premiums, such as for General Electric are higher than they have been for quite some time.

While numerous stocks can make a case that their current prices represent an attractive entry level, General Electric can certainly pick up the pieces even if there is further downside.

The worst case scenario in the event of further price declines is that the General Electric position becomes a longer term one while you collect a nice dividend and maybe some additional option premiums along the way.

T-Mobile (TMUS) reports earnings this week.

I’m struck by two things as that event approaches.

The first is what seems to be an even increasing number of T-Mobile television ads and the increasing financial burden that must be accruing as it continues to seek and woo subscribers away from its competitors.

The second comes from the option market.

I generally look at the “implied move” predicted by the option market when a company is about to report earnings. For most companies, the option premiums near the strike price are very similar for both puts and calls, particularly if the current price is very close to the strike price. However, in the case of T-Mobile, there is considerable bias on the call side.

The implied move is about 8.1%, but about 5.4% of that is from the very high call premium. The clear message is that the option market expects T-Mobile to move higher next week. It’s unusual to see that much of a declaration of faith as is being demonstrated at the moment.

When I see something like that, the oppositional side of me even thinks about buying puts if I didn’t mind the almost all or none proposition involved with that kind of a trade.

However, rational though pushes that oppositional piece of me to the side and while I generally like the idea of selling puts ahead of earnings, in this case, there may be good reason to consider the purchase of shares and the sale of calls, perhaps even deep in the money calls, depending upon the balance of risk and reward that one can tolerate.

Finally, if you’ve been following the news, you know that it wasn’t a particularly good week to have been a cruise line or perhaps to have been a cruise line passenger. While there may be lots of great things about being a passenger, it seems that we hear more and more about how either a virus or the rough seas will take its toll.

With an upcoming ex-dividend date this week and a severe price descent, Carnival (CCL) is finally looking attractive to me again after nearly 18 months of not having owned shares.

With earnings early in the April 2016 cycle there are a number of different approaches in the coming week to the shares.

One approach may simply be the purchase of shares and the concomitant sale of in the money February 2016 call options, which are the equivalent of a weekly option, as expiration is this Friday. In such as case, whether using the at the money or in the money strike, the intent is to at least generate option premium and perhaps the dividend, as well, while having the position exercised.

Alternatively, a larger premium can be exacted by selling a March 2016 out of the money option and more predictably ensuring the capture of the premium. With earnings coming early in the April 2016 option cycle, the more daring investor can also consider the use of even longer dated out of the money options in the hopes of getting an more substantive share gains in addition to the dividend and an earnings enhanced option premium.

I’m more inclined to go for the full journey on this one and extend my stay even if there may be some bumpiness ahead. 

Traditional Stocks: General Electric, Sinclair Broadcasting, Weyerhauser

Momentum Stocks: Best Buy

Double-Dip Dividend: Carnival (2/17 $0.30)

Premiums Enhanced by Earnings: T-Mobile (2/17 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 – February 7, 2016

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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.