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 – September 6, 2015

Stop and take a break.

I’ve been doing just that, taking a break, for about the past 5 years, but sometimes I think that I’m working harder than ever.

Lately, however, I don’t feel as if I’m on a forward path so it may be time to do exactly what the Chinese stock markets did last week and what the US stock markets are doing this coming week.

They both took some time off and perhaps it was timed to perfection. After a 42% decline in Shanghai in less than 10 weeks and a 10% drop in the S&P 500 in 6 weeks, it was definitely time to take a breather and smell the dying flowers.

China took a couple of days off for celebrations ostensibly commemorating the end of World War II. While doing so they may also have wanted to show the nation and the world just how together they have things and just how much in control they really are at a time when the image is becoming otherwise.

After all, if the Faustian Bargain in place can no longer deliver on the promise of a higher standard of living, the message of an all powerful government has to be reinforced, lest people think they can opt out of the deal and choose democracy instead.

Equally ostensibly, guided by environmental concerns and the health of its citizens, the Chinese government decided to have factories in and around Beijing closed for the days preceding the festivities in order to help clear the air a bit, but only in a non-metaphorical kind of way. The literal and figurative haze is far too thick for cosmetic actions to change anything.

Unfortunately, what we may be coming to realize is that the Chinese economic miracle we’ve come to admire may be the actual culprit for all of that pollution, through its extensive use of smoke and mirrors.

While taking some time off it’s not entirely clear whether any other “malicious short sellers” are disappearing from view and being prevented from polluting trading markets or whether arrests and detentions are also taking a much needed holiday.

Here in the United States we celebrate Labor Day by not working, rather than working extra hard and we rarely send anyone to prison for accelerating the process that leads to a financial slide.

As long as people are beginning to make comparisons between the current market correction that seems to be related to China’s market meltdown and our own financial meltdown of the past decade, it only seems appropriate to note that the key difference between our nations in that regard is that Countrywide CEO Angelo Mozilo could never have gotten a natural suntan in Beijing.

He also wouldn’t have ever seen the light of day, even it such a thing was possible through all of that haze, again after suddenly disappearing on a less than voluntary basis.

In the United States Labor Day comes every year, but a 70th anniversary celebration of the end of World War II comes but once and it may not have come as a better time, as the world is wondering just what is going on in China.

Putting the brakes on the ever-present haze and lung clogging air for a couple of days won’t make much difference and so far, neither have efforts to control market forces. Both have lots of momentum behind them and are likely to remain recalcitrant in the near term, even to the most totalitarian of governments.

When it comes to managing the economy we may be at the tip of the iceberg in terms of realizing that no one really knows what’s going on and just how accurately the modern miracle has been portrayed. But that’s the usual situation when smoke and mirrors are in place and the stakes so high.

While the Chinese markets were closed a little bit of calm overtook US markets, as there was some evidence with the release of the ADP Employment Report that bad news was again being interpreted as being good, insofar as it could delay interest rate hikes from the FOMC.

The subsequent fading of any meaningful rally to offset large losses earlier in the week was disappointing, but it was the good news and bad news nature of the Employment Situation Report that sent markets tumbling without any help from China.

The good news that was interpreted as being bad and, therefore, making a rate hike more likely at the next FOMC meeting was that the unemployment rate fell to 5.1% even in the face of mildly disappointing growth in employment and wage stagnation.

Even dusting off twice removed Federal Reserve Chairman Alan Greenspan to appropriately comment that there’s no logical reason to fear a small rate increase did nothing to re-introduce rational thought into those engaged in indiscriminate selling.

Ending the week with a large loss was bad enough. But doing so and being left behind the eight ball more than usual this week as the Shanghai market re-opens for business on Sunday makes this weekend more uncertain than usual. With Labor Day serving as an additional day to be handcuffed as passive observers we stand to have China once again put us in a position of reaction, rather than leading the world with its most vibrant and sustainable economy.

So, while I really welcome, want and need the day off on Monday for more reasons than usual, I can’t wait for Tuesday.

That makes about as much sense as everything else these days.

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

“Buying on the dip” hasn’t been as prevalent as in the past during what turned out to be a series of mini-corrections, as we’ve watched the market head into correction, then out of correction, back in and out again. For some reason, though, I’ve been a little more active in adding new positions than I would have expected at the beginning of each of the past few weeks, in the belief some price levels truly represented opportunities.

Most of that interest in buying has been dividend driven and this week is definitely one that is likely to continue that trend if I can justify the faith necessary to add any new positions.

With the exception of Best Buy (BBY) which had a very nice week as the S&P 500 fell by over 3% and Altria (MO), which matched the index for its poor performance, the remaining selections going ex-dividend this week all badly trailed the S&P 500 last week.

That’s not exactly the basis for a strong recommendation, but with the exception of BHP Billiton (BHP), it may be difficult to find a really good reason for such under-performance.

Not that it’s much consolation, however, all but BHP Billiton have actually out-performed the S&P 500 since its top, although Best Buy is the only one to have actually appreciated in share value.

Some of the potential selections, such as Altria (MO) and Merck (MRK) haven’t been very attractive “Double Dip Dividend” selections for quite a while. In a low volatility environment in the context of a relatively large premium essentially spanning the distance from one $0.50 strike level to the next, there has been very little subsidy of the dividend by the option premium and those stocks were much more likely to be assigned early if in the money.

However, the volatility induced increase in premiums is beginning to make even these high yielders that also have large dividends in absolute terms more and more worthy of consideration.

In a week that pharmaceutical companies struggled to keep up with the S&P 500 I do like the potential trades, specifically to attempt to capture dividends and option premiums in Merck and Gilead (GILD). In both cases, that’s being considered without regard to issues of pipeline.

Due to the increased market volatility their premiums make them both especially attractive considerations this week. in addition as they have also lagged the S&P 500 over the past week and month.

Merck is ex-dividend on Friday and I would consider selling a weekly in the money strike, but being prepared to roll the position over to the following week if assignment seems likely. With a dividend of $0.45, that generally means that the closing price on Thursday would have to be at least $0.45 in the money for a logical investor to exercise their options, although Merck is frequently subject to dividend arbitrage and is more likely than most to be exercised even if there is just a very small margin above that threshold price, especially if there is very little time remaining on the contract.

Gilead, on the other hand is ex-dividend on Monday of the following week. For that reason I would consider selling an in the money option contract expiring at the end of the September 2015 option cycle and wouldn’t be disappointed if the contract was exercised early. In essence the additional premium received for the week of time value atones for the early assignment.

Pfizer (PFE), on the other hand, is not ex-dividend this week, but has finally returned to a price level that I wouldn’t mind once again owning shares.

During the period of its share price climb, as is so often the case, the option premiums became less and less enticing. However, now that it has had a 13% decline in the past month, that premium is finally at a point that it offers adequate reward for the risk of further decline.

As with Merck and Gilead, the consideration of Pfizer isn’t based on pipeline nor on fundamental considerations, but purely on price and premium.

While healthcare stocks generally out-performed the S&P 500 over the past week, one notable exception was UnitedHealth Group (UNH), which is also ex-dividend this week.

In my home state of Maryland the regulatory agency approved a 26% increase in rates for Anthem (ANTM), but small premium declines for UnitedHealth policies on Friday. The relative weakness in UnitedHealth shares, however, was week long and not likely influenced by that news, as Anthem is by far the major insurance carrier in that state.

However, as is so increasingly the case, the combination of an uncertainty induced higher option premium, a dividend and the potential for some bounce back in short term share price is very appealing.

Especially when logic would dictate that China poses no threat to UnitedHealth Group’s performance, as long as logic is permitted free expression for a change.

American International Group (AIG) also goes ex-dividend this week.

I haven’t owned shares in a while and certainly haven’t done so since the passing of Robert Ben Mosche, who I considered an essentially unsung hero. His calm and steady guidance of AIG, having returned from retirement on the beaches of Croatia, was an antithesis to the reckless actions of Angelo Mozilo.

However, with its return to respectability as a company and as a stock came a decrease in option premiums and even with the re-institution of a dividend, it wasn’t a magnet for investment.

This week, the situation is different.

With a significantly increased dividend, a nearly 10% decline in the past month, an enhanced option premium and the likelihood of interest rates moving higher, AIG may be ready to hit on all cylinders.

After so much discussion about healthcare and insurance related stocks, it only seems fair to give Altria some attention. Prior to spinning off Philip Morris (PM), which was the real engine of its growth from its international activities, this was a true triple threat stock. It had great option premiums, a generous dividend and room for share appreciation, as long as you were willing to let other people participate in their own Faustian deal.

However, with the loss of Philip Morris’ growth and with declining option premiums, it has lost its luster for me, just as it has the ability to take the sheen off from health pulmonary tissue.

However, a recent 6% decline, a growing option premium and a great dividend are reasons to consider welcoming it back into the fold, even if not permitting its use in your home.

I already own two lots of Best Buy shares and rolled both over early in order to have a better chance of capturing the dividend. As with Merck, those shares go ex-dividend on Friday.

However, as opposed to Merck and so many others that are near some near term price lows, Best Buy gained in price the past week and has been doing so since reporting its earnings recently.

I would consider purchasing another lot of Best Buy shares but would be willing to cede the dividend to early assignment, based on the generous option premiums. To do so, that might be accomplished by purchasing shares and selling in the money weekly calls or even deeper in the money calls expiring the following week.

Palo Alto Networks (PANW) reports earnings this week and as with even relatively “safe” stocks of late, it may not be for the faint hearted, as it can and has made some fairly significant price moves in the past when earnings have been released.

As it is, shares of this enterprise security company are already 14% lower in the past month and meaningful price support is still about another 10% lower.

The option market is implying a 7.8% price move next week. However, a 1% weekly ROI may be potentially obtained through the sale of a weekly put contract at a strike price 10.2% below Friday’s closing price.

While the options market is beginning to do a better job of estimating price performance after a period of under-estimating downside risk, I think that there may still be some additional risk, so I would probably defer those put sales until after earnings and only in the event that there is a sharp decline in shares that could bring it closer to that support level.

For those willing to play in the land of risk, BHP Billiton is ex-dividend this week and offers a semi-annual dividend that appears to be safe, despite a nearly 8% yield. While it has decreased its dividend minimally in the past, nearly 14 years ago, it has never suspended it, despite some significant decreases in commodity prices over the years and in contrast to others, such as Freeport-McMoRan (FCX).

BHP Billiton offers only monthly option contracts and doesn’t have strike levels gradated in single or half dollar units. With its current price almost perfectly between the $32.50 and $35 strike levels and its ex-dividend date occurring early in the week, the potential short term strategies are to either sell an in the money option with a high likelihood of early assignment, or an out of the money option in the hopes of getting it all.

Finally, I missed the last strong move higher by LuLuLemon Athletica (LULU) and had shares assigned after that climb that left me in the dust. I was still happy to be out of those shares after a 13 month holding period. While it had an ROI of 10.3% that was only 0.6% better than the S&P 500 for the same period of time, so not a very worthwhile way to park money, all in all.

LuLuLemon reports earnings this week and it’s no stranger to large price moves.

Prior to this very recent increase in market volatility the options market has been under-estimating the price range that a number of stocks might move upon earnings release and I was more inclined to consider a trade, such as the sale of puts, only after earnings were released and shares plummeted beyond the lower boundary implied by the options market.

However, as volatility has made a return, the price ranges implied by the options market is beginning to increase and it is getting easier to find strike levels outside of the range that can return my threshold 1% ROI on the sale of a weekly put contract. 

The option market has implied a price move of 9.6% and a 1% ROI could potentially be achieved through the sale of a put option if shares fall less than 11.5% following earnings.

Unlike Palo Alto Networks and unlike so many other stocks in the investor’s universe, LuLuLemon is within reach of its 52 week high, which certainly makes it stand out in a crowd, even if not bent over sufficiently to bring any defectively sheer garments to their limits.

While on a different recent path from Palo Alto Networks, LuLuLemon is also a trade that I would consider only in the event of a sharp price decline and would seek to take advantage of any selling done in panic mode.

Unless of course that turns out to be the theme for the week, in which case I would rather wait for some calmer heads to prevail before loosening the grip on cash.

Traditional Stock: Pfizer

Momentum Stock: none

Double-Dip Dividend:  Altria (9/11), American International Group (9/10), Best Buy (9/11), BHP Billiton (9/9), Gilead (9/14), Merck (9/11), UnitedHealth Group (9/9)

Premiums Enhanced by Earnings: LuLuLemon Athletica (9/10 AM), Palo Alto Networks (9/9 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 – January 11, 2015

Somewhere buried deep in my basement is a 40 year old copy of the medical school textbook “Rapid Interpretation of EKG’s.”

After a recent bout wearing a Holter Monitor that picked up 3000 “premature ventricular contractions” I wasn’t the slightest bit interested in finding and dusting off that copy to refresh my memory, not having had any interest nearly 40 years ago, either.

All I really cared about was what the clinical consequence of those premature depolarizations of the heart’s ventricle meant for me and any dreams I still harbored of climbing Mount Everest.

Somewhere in the abscesses of my mind I actually did recall the circumstances in which they could be significant and also recalled that I never aspired to climb Mount Everest.

But it doesn’t take too much to identify a premature ventricular contraction, even if the closest you ever got to medical school was taking a class on Chaucer in junior college.

Most people can recognize simple patterns and symmetry. Our mind is actually finally attuned to seeing breaks in patterns and assessing even subtle asymmetries, even while we may not be aware. So often when looking askance at something that just seems to be “funny looking,” but you can’t quite put your finger on what it is that bothers you, it turns out to be that lack of symmetry and the lack of something appearing where you expect it to appear.

So it’s probably not too difficult to identify where this (non-life threatening) premature ventricular contraction (PVC) is occurring.

While stock charts don’t necessarily have the same kind of patterns and predictability of an EKG, patterns aren’t that unheard of and there has certainly been a pattern seen over the past two years as so many have waited for the classic 10% correction.

 

What they have instead seen is a kind of periodicity that has brought about a “mini-correction,” on the order of 5%, every two months or so.

The quick 5% decline seen in mid-December was right on schedule after having had the same in mid-October, although the latter one almost reached that 10% level on an intra-day basis.

But earlier this week we experienced something unusual. There seemed to be a Premature Market Contraction (NYSE:PMC), occurring well before the next scheduled mini-correction.

You may have noticed it earlier this week.

The question that may abound, especially following Friday’s return to the sharp market declines seen earlier in the week is just how clinically important those declines, coming so soon and in such magnitude, are in the near term.

In situations that impact upon the heart’s rhythm, there may be any number of management approaches, including medication, implantation of pacemakers and lifestyle changes.

The market’s sudden deviation from its recently normal rhythm may lend itself to similar management alternatives.

With earnings season beginning once again this week it may certainly serve to jump start the market’s continuing climb higher. That may especially be the case if we begin to see some tangible evidence that decreasing energy prices have already begun trickling down into the consumer sector. While better than expected earnings could provide the stimulus to move higher, rosy guidance, also related to a continuing benefit from decreased energy costs could be the real boost looking forward.

Of course, in a nervous market, that kind of good news could also have a paradoxical effect as too much of a good thing may be just the kind of data that the FOMC is looking for before deciding to finally increase interest rates.

By the same token, sometimes it may be a good thing to avoid some other stimulants, such as hyper-caffeinated momentum stocks that may be particularly at risk when the framework supporting them may be suspect.

This week, having seen 5 successive days of triple digit moves, particularly given the context of outsized higher moves tending to occur in bear market environments, and having witnessed two recent “V-Shaped” corrections in close proximity, I’d say that it may be time to re-assess risk exposure and take it easier on your heart.

Or at least on my heart.

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

Dividends may be just the medication that’s needed to help get through a period of uncertainty and the coming week offers many of those opportunities, although even within the week’s upcoming dividend stocks there may be some heightened uncertainty.

Those ex-dividend stocks that I’m considering this week are AbbVie (NYSE:ABBV), Caterpillar (NYSE:CAT), Freeport McMoRan (NYSE:FCX), Whole Foods (NASDAQ:WFM) and YUM Brands (NYSE:YUM).

AbbVie is one of those stocks that has been in the news more recently than may have been envisioned when it was spun off from its parent, Abbott Labs (NYSE:ABT), both of which are ex-dividend this week.

AbbVie has been most notably in the news for having offered an alternative to Gilead’s (NASDAQ:GILD) product for the treatment of Hepatitis C. Regardless of the relative merits of one product over another, the endorsement of AbbVie’s product, due to its lower cost caused some short term consternation among Gilead shareholders.

AbbVie is now trading off from its recent highs, offers attractive option premiums and a nice dividend. That combination, despite its upward trajectory over the past 3 months, makes it worth some consideration, especially if your portfolio is sensitized to the whims of commodities.

Caterpillar is finally moving in the direction that Jim Chanos very publicly pronounced it would, some 18 months ago. There isn’t too much question that its core health is adversely impacted as economic expansion and infrastructure projects slow, as it approaches a 20% decline in the past 2 months.

That decline takes us just a little bit above the level at which I last owned shares and its upcoming dividend this week may provide the impetus to open a position. I suppose that if one’s time frame has no limitation any thesis may find itself playing out, for Chanos‘ sake, but for a short time frame trade the combination of premium and dividend at a price that hasn’t been seen in about a year seems compelling.

It has now been precisely a year since the last time I purchased shares of YUM Brands and it is right where I last left it. Too bad, because one of the hallmarks of an ideal stock for a covered option position is no net movement but still traveling over a wide price range.

YUM Brands fits that to a tee, as it is continually the recipient of investor jitteriness over the slowing Chinese economy and food safety scares that take its stock on some regular roller coaster rides.

I’m often drawn to YUM Brands in advance of its ex-dividend date and this week is no different, It combines a nice premium, competitive dividend and plenty of excitement. While I could sometimes do without the excitement, I think my heart and, certainly the option premiums, thrive on the various inputs that create that excitement, but at the end of the day seem to have no lasting impact.

Whole Foods also goes ex-dividend this week and while its dividend isn’t exactly the kind that’s worthy of being chased, shares seem to be comfortable at the new level reached after the most recent earnings. That level, though, simply represents a level from which shares plummeted after a succession of disappointing earnings that coincided with the height of the company’s national expansion and the polar vortex of 2014.

I think that shares will continue to climb heading back to the level to which they were before dropping to the current level more than a year ago.

For that reason, while I usually like using near the money or in the money weekly options when trying to capture the dividend, I’m considering an out of the money February 2015 monthly option in consideration of Whole Foods’ February 11th earnings announcement date.

I don’t usually follow interest rates or 10 Year Treasury notes very carefully, other than to be aware that concerns about interest rate hikes have occupied many for the entirety of Janet Yellen’s tenure as the Chairman of the Federal Reserve.

With the 10 Year Treasury now sitting below 2%, that has recently served as a signal for the stock market to begin a climb higher. Beyond that, however, declining interest rates have also taken shares of MetLife (NYSE:MET) temporarily lower, as it can thrive relatively more in an elevated interest rate environment.

When that environment will be upon us is certainly a topic of great discussion, but with continuing jobs growth, as evidenced by this past week’s Employment Situation Report and prospects of increased consumer spending made possible by their energy dividend, I think MetLife stock has a bright future. 

Also faring relatively poorly in a decreasing rate environment has been AIG (NYSE:AIG) and it too, along with MetLife, is poised to move higher along with interest rates.

Once a very frequent holding, I’ve not owned shares since the departure of Robert ben Mosche, whom I believe deserves considerable respect for his role in steering AIG in the years after the financial meltdown.

In the meantime, I look at AIG, in an increasing rate environment as easily being able to surpass its 52 week high and would consider covering only a portion of any holding in an effort to also benefit from share price advances.

Fastenal (NASDAQ:FAST) isn’t a very exciting company, but it is one that I really like owning, especially at its current price. Like so many others that I like, it trades in a relatively narrow range but often has paroxysms of movement when earnings are announced, or during the occasional “earnings warnings” announcement.

It announces earnings this week and could easily see some decline, although it does have a habit of warning of such disappointing numbers a few weeks before earnings.

Having only monthly options available, but with this being the final week of the January 2015 option cycle, one could effectively sell a weekly option or sell a weekly put rather than executing a buy/write.

However, with an upcoming dividend early in the February 2015 cycle I would be inclined to consider a purchase of shares and sale of the February calls and then buckle up for the possible ride, which is made easier knowing that Fastenal can supply you with the buckles and any other tools, supplies or gadgets you may need to contribute to national economic growth, as Fastenal is a good reflection on all kinds of construction activity.

Bank of America (NYSE:BAC) also reports earnings this week and I unexpectedly found myself in ownership of shares last week, being unable to resist the purchase in the face of what seemed to be an unwarranted period of weakness in the financial sector and specifically among large banks.

Just as unexpectedly was the decline it took in Friday’s trading that caused me to rollover shares that i thought had been destined for assignment, as my preference would have been for that assignment and the possibility of selling puts in advance of earnings.

Now, with shares back at the same price that I liked it just last week, its premiums are enhanced this week due to earnings. In this case, if considering adding to the position I would likely do so by selling puts. However, unlike many other situations where I would prefer not to take assignment and would seek to avoid doing so by rolling over the puts, I wouldn’t mind taking assignment and then turning around to sell calls on a long position.

Finally, while it may make some sense to stay away from momentum kind of stocks, Freeport McMoRan, which goes ex-dividend this week may fall into the category of being paradoxically just the thing for what may be ailing a portfolio.

Just as stimulants can sometimes have such paradoxical effects, such as in the management of attention deficit hyperactivity disorder, a stock that has interests in both besieged metals, such as copper and gold, in addition to energy exploration may be just the thing at a time when weakness in both of those areas has occurred simultaneously and has now become well established.

Freeport McMoRan will actually report earnings the week after next and that will present its own additional risk going forward, but I think that the news will not be quite as bad as many may expect, particularly as there is some good news associated with declining energy prices, as they represent the greatest costs associated with mining efforts.

I’ve suffered through some much more expensive lots of Freeport McMoRan for the past 2 years and have almost always owned shares over the past 10 years, even during that brief period of time in which the dividend was suspended.

As surely as commodity prices are known to be cyclical in nature at some point Freeport will be on the right end of climbs in the price of its underlying resources. If both energy and metals can turn higher as concurrently as they turned lower these shares should perform exceptionally well.

After all, they’ve already shown that they can perform exceptionally poorly and sometimes its just an issue of a simple point of inflection to go from one extreme to the next.

Traditional Stocks: AIG, MetLife

Momentum Stocks: none

Double Dip Dividend: AbbVie (1/13), Caterpillar (1/15), Freeport McMoRan (1/13), Whole Foods !/14), YUM Brands (1/14)

Premiums Enhanced by Earnings: Bank of America (1/15 AM), Fastenal (1/15 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 – September 7, 2014

There was no shortage of news stories that could have prevented the market from setting yet another new closing high this week.

While much of the week was spent on discussing the tragic sequence of events leading to the death of Joan Rivers, markets still had a job to do, but may have been in no position to stop the momentum, regardless of the nature of more germane events.

Despite what everyone agrees to have been a disappointing Employment Situation Report, the market shrugged off that news and closed the week at another new record. They did so as many experts questioned the validity of the statistics rather than getting in the way of a market that was moving higher.

As the saying goes “you don’t step in front of a moving train.”

The previous day, with the announcement by ECB President Mario Draghi of further decreases in interest rates and more importantly the institution of what is being referred to as “Quantitative Easing Lite,” the market chose to ignore the same reasoning that many believed was behind our own market’s steady ascent and could, therefore, pose a threat to that continued ascent.

Many agreed that the Federal Reserve’s policy of Quantitative Easing was a major reason for our equity market’s climb, as it fueled a flight of assets from low return bonds and from overseas. Now, with the same ingredients being assembled for a similar environment in European markets “QE Lite” could represent competition to US equity markets through our own flight of assets.

Barry Ritholtz, a noted equities analyst, recently commented that the drop in CNBC viewership to all time low levels was a “hugely bullish” sign for the markets, using their viewership as a contrarian indicator.

Never mind that along with them may be the loss of continued fuel to propel the markets onward, or consistent with disappointing employment numbers perhaps viewers are electing to drop their basic cable service before giving up their smartphone data plans.

There aren’t too many ways to stop a runaway train. The sheer momentum of a heavy projectile moving at high speed is hard to counter. You really don’t want to step in front of it as a primary strategy.

What makes that train run, however, is its fuel and at some point that fuel runs out.

However, by the same token there was no shortage of news that could have sent the markets soaring much higher.

Fuel, meet brakes.

Instead, the week closed up only slightly higher, yet continuing the weekly record of more new highs that lasted all throughout August.

What the market didn’t do was to embrace the news of a Ukraine-Russia truce, whereas weeks earlier it had shown that it cared deeply about such news, rallying on its rumor and falling on renewed conflict.

Even runaway trains may be able to be controlled by applying the brakes. The lack of a strong response to the thought of a lasting truce in the Ukraine conflict may be a reflection of some working brakes that may still be part of the equation.

While this week did finish at another new closing high, it did so without real conviction. While a runaway train would have great difficulty staying on track when coming to a curve, that may be precisely where the market now finds itself.

Whether it derails or not may be as much related to whether that curve is an inflection or simply a barrier to seeing what may lay ahead.

This past week, I think the market actually got it right, by not over-reacting to anything, as it demonstrated caution, perhaps aware that the curve ahead was steep.

How unusual would that have been? Rational markets?

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

A number of potential selections this week share the common bond of having been recipients of bad news recently.

British Petroleum (BP), a perennial bad guy when it comes to environmental record and safety received word of an $18 billion fine related to the devastating Gulf Oil spill. Despite a bounce back on Friday and assignment of shares that I had bought just the previous day, the response to that fine is very reminiscent of the initial reaction to similar news that greeted Anadarko (APC).

The bad news is tantamount to nothing more than metaphoric brakes having now been applied and defining the end of their liability. On the other hand, there is certainly the possibility of payment being delayed for years as appeals work their way through the judicial system or an agreement to a lesser penalty, which could only buoy shares. The introduction of this new level of uncertainty certainly buoyed British Petroleum’s option premiums last week and that appears to be carrying through to the coming week.

The Gap (GPS) remains an anachronism as it reports monthly same store sales. For those following those results it appears that every month or two the story is at a polar opposite to previous reports and the stock responds accordingly. This time the report showed a 2% decline, whereas analysts were expecting a 2% increase in sales.

The subsequent sharp decline in shares was eased somewhat my the market’s close and is still somewhat higher than I would like to re-initiate a position, but it is back on the radar screen after having been recently assigned. At the $42 level it has been a very good covered call trade.

eBay (EBAY), despite the steady stream of disparagement, has been one of my favorite positions. It, like The Gap is a little higher than where I would ideally like to start or add to a position, but then again, what isn’t?

The bad news confronting eBay may become reality this week, as Apple (AAPL) unveils its new products on Tuesday, which are rumored to incorporate a payment system that could then compete directly with eBay’s PayPal division.

Based upon the market’s reaction to news of Carl Icahn’s position in eBay and the reaction upon rumor that eBay was telling prospective PayPal officers that it would be spun off, suggests that competition could be beneficial to eBay’s share price, as it could speed up the spin off of a very valuable asset, particularly before that asset has a chance to erode.

eBay’s option premiums for the coming week certainly are reflective of near term uncertainty that is very likely related to what most have probably already discounted.

One of the things that has made eBay a favorite of mine is the serial nature in which I’ve been able to buy shares and sell calls over the past few years. That’s a characteristic that isn’t found frequently enough and depends on a stock’s being able to trade in a reasonably defined range, while still having some occasional spikes and plunges.

T-Mobile (TMUS) is beginning to show some of those same characteristics, although it may not be in the picture for as long as eBay has been, owing to the clear message that it is in play. It needs a capital infusion just as it needs more spectrum. Its parent has already indicated that it would be a willing seller at $35.

Demonstrating some support at $28.50 and having an apparent upper cap, I like when ranges are defined, particularly as its price can easily modulate itself within that range on any news or rumor. Those sort of events help to keep its option premium appealing and enable it to be traded on a serial basis, as well, or simply rolling over option contracts to help the premiums accumulate.

I haven’t owned shares of Kors (KORS) for a while, and have not been particularly fond of it as it has largely been held responsible for the sales and share price woes at Coach (COH), which like eBay, has been one of my covered option favorites, thanks to its price mediocrity, but consistent option premium stream.

With news of a secondary stock offering whose shares represent complete divestiture by the private equity firm that once held a majority interest in the company and the departure of two board members, it can’t get too much worse for shares, unless it too is a runaway train.

News of product discounting and slowing revenue growth compounds the insult of not receiving any of the proceeds of the secondary offering, which is expected to close this coming week. As with a number of other stocks in the “bad news” category, the option premiums are elevated, but much of the bad news may have already been digested.

Among this week’s potential dividend selections, there is some recent bad news at AIG (AIG), which hasn’t been reflected in its share price.

That is additional credit to Robert Benmosche, the past CEO, who recently announced that his longstanding cancer is now thought to be of a terminal nature. His legacy, will undoubtedly include him as one of the heroes coming out of the financial crisis, with a reputation enhanced by his commitment even during periods of personal duress.

While no one is going to chase shares of AIG in order to capture its tiny dividend, it along with a number of other stocks highlighted this week continue the strategy of looking for positions that have trailed the S&P 500 during the past summer. Unlike some of the others burdened by recent bad news, AIG isn’t offering an enriched option premium, again somewhat of a tribute to the stability created by Benmosche.

Both Coca Cola (KO) and Merck (MRK) are ex-dividend this week. Neither is a frequent point of focus for me, but both may represent some reasonable safety, although Merck has out-performed the S&P 500 this summer.

As is commonly the case with companies that are DJIA components that offer better than average dividends, there isn’t as readily obtainable advantage to attempting to “double dip.” For that reason, when considering the purchase of shares in advance of the dividend and if using an in the money strike price, it may make some sense to use something other than a weekly option, so that the additional time value may end up being a factor in limiting the incidence of early exercise.

Despite both companies having significant international exposure I don’t believe that any near term flare ups will unduly drag either of them downward and during a period of continuing low volatility those dividends look ever more attractive, particularly if risk is mitigated.

Finally, Whole Foods (WFM), while not one of my recent favorite stocks, has lately been presenting excellent opportunity to whittle down paper losses on an all too expensive lot of shares that has been sitting fallow, with no hedges sold against it for a while.

It appears, from its recent price behavior that shares have found some reasonable support at $38.50 and may be ready to begin a climb higher as it may start deriving some benefits from its significant expansion over the past year. Together with the fact that its controversial co-CEO hasn’t said much in the way of inflammatory comments lately, has helped the shares maintain some semblance of stability.

In this case, Whole Foods may be ready to be the beneficiary of some good news. It, along with some others this week, are offering option premiums that are in clear contrast to the steadily decreasing premiums more commonly being seen.

Personally, I’m all for this runaway train to keep running, just as long as it does so at a reasonable speed, so that there’s plenty of opportunity to get off. Perhaps this past week’s performance shows some good common sense, which is what really makes it so unusual, but would represent a welcome change.

Traditional Stocks: British Petroleum, eBay, The Gap, Whole Foods

Momentum: Kors, T-Mobile

Double Dip Dividend: AIG (9/9). Coca Cola (9/11), Merck (9/11)

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 16, 2014

Is our normal state of dysfunction now on vacation?

Barely seven trading days earlier many believed that we were finally on the precipice of the correction that had long eluded the markets.

Sometimes it’s hard to identify what causes sudden directional changes, much less understand the nature of what caused the change. That doesn’t stop anyone from offering their proprietary insight into that which may sometimes be unknowable.

Certainly there will be technicians who will be able to draw lines and when squinting really hard be able to see some kind of common object-like appearing image that foretold it all. Sadly, I’ve never been very adept at seeing those images, but then again, I even have a hard time identifying “The Big Dipper.”

Others may point to an equally obscure “Principle” that hasn’t had the luxury of being validated because of its rare occurrences that make it impossible to distinguish from the realm of “coincidence.”

For those paying attention it’s somewhat laughable thinking how with almost alternating breaths over the past two weeks we’ve gone from those warning that if the 10 year Treasury yield got up to 3% the market would react very negatively, to warnings that if the yield got below 2.6% the markets would be adverse. There may also be some logical corollaries to those views that are equally not borne out in reality.

Trying to explain what may be irrational markets, which are by and large derivatives of the irrational behaviors found in those comprising the markets, using a rational approach is itself somewhat irrational.

Crediting or blaming trading algorithms has to recognize that even they have to begin with the human component and will reflect certain biases and value propositions.

But the question has to remain what caused the sudden shifting of energy from its destruction to its creation? Further, what sustained that shift to the point that the “correction” had itself been corrected? As someone who buys stocks on the basis of price patterns there may be something to the observation that all previous attempts at a correction in the past 18 months have been halted before the 10% threshold and quickly reversed, just as this most recent attempt.

That may be enough and I suppose that a chart could tell that story.

But forget about those that are suggesting that the market is responding to better than expected earnings and seeking a rational basis in fundamentals. Everyone knows or should know that those earnings are significantly buoyed by share buybacks. There’s no better way to grow EPS than to shrink the share base. Unfortunately, that’s not a strategy that builds for the future nor lends itself to continuing favorable comparisons.

I think that the most recent advance can be broken into two component parts. The first, which occurred in the final two days of the previous trading week which had begun with a 325 point gain was simply what some would have called “a dead cat bounce.” Some combination of tiring from all of the selling and maybe envisioning some bargains.

But then something tangible happened the next week that we haven’t seen for a while. It was a combination of civility and cooperation. The political dysfunction that had characterized much of the past decade seemed to take a break last week and the markets noticed. They even responded in a completely normal way.

Early in the week came rumors that the House of Representatives would actually present a “clean bill” to raise the nation’s debt ceiling. No fighting, no threats to shut down the government and most importantly the decision to ignore the “Hastert Rule” and allow the vote to take place.

The Hastert Rule was a big player in the introduction of dysfunction into the legislative process. Even if a majority could be attained to pass a vote, the bill would not be brought to a vote unless a majority of the majority party was in favor the bill. Good luck trying to get that to occur in the case of proposing no “quid pro quo” in the proposal to raise the nation’s debt ceiling.

The very idea of some form of cooperation by both sides for the common good has been so infrequent as to appear unique in our history. Although the common good may actually have taken a back seat to the need to prevent looking really bad again, whatever the root cause for a cessation to a particular form of dysfunction was welcome news.

While that was being ruminated, Janet Yellen began her first appearance as Federal Reserve Chairman, as mandated by the Humphrey-Hawkins Bill.

Despite the length of the hearings which would have even tired out Bruce Springsteen, they were entirely civil, respectful and diminished in the use of political dogma and talking points. There may have even been some fleeting moments of constructive dialogue.

Normal people do that sort of thing.

But beyond that the market reacted in a straightforward way to Janet Yellen’s appearance and message that the previous path would be the current path. People, when functioning in a normal fashion consider good news to be good news. They don’t play speculative games trying to take what is clear on the surface to its third or fourth derivative.

Unfortunately, for those who like volatility, as I do, because it enhances option premiums, the lack of dysfunction and the more rational approach to markets should diminish the occurrence of large moves in opposite directions to one another. In the real world realities don’t shift that suddenly and on such a regular basis, however, the moods that have moved the markets have shifted furiously as one theory gets displaced by the next.

How long can dysfunction stay on vacation? Human nature being what it is, unpredictable and incapable of fully understanding reality, is why so many in need stop taking their medications, particularly for chronic disorders. I suspect it won’t be long for dysfunction to re-visit.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Speaking of dysfunction, that pretty well summarizes the potash cartel. Along with other, one of my longtime favorite stocks, Mosaic (MOS) has had a rough time of things lately. In what may be one of the great blunders and miscalculations of all time, there is now some speculation that the cartel may resume cooperation, now that the CEO of the renegade breakaway has gone from house arrest in Belarus to extradition to Russia and as none of the members of the cartel have seen their fortunes rise as they have gone their separate ways.

In the interim Mosaic has traded in a very nice range after recovering from the initial shock. While I still own more expensively priced shares their burden has been somewhat eased by repetitive purchases of Mosaic and the sale of call contracts. Following an encouraging earnings report shares approached their near term peak. I would be anxious to add shares on even a small pullback, such as nearing $47.50.

^TNX ChartOne position that I’ve enjoyed sporadically owning has been MetLife (MET) which reported earnings last week. As long as interest rates are part of anyone’s equation for predicting where markets or stocks will go next, MetLife is one of those stocks that received a bump higher as interest rates started climbing concurrent with the announcement of the Federal Reserve;’s decision to initiate a taper to Quantitative Easing.

Cisco (CSCO), to hear the critics tell the story is a company with a troubled future and few prospects under the continued leadership of John Chambers. For those with some memory, you may recall that Chambers has been this route before and has been alternatively glorified, pilloried and glorified again. Currently, he has been a runner-up in the annual contest to identify the worst CEO of the year.

Personally, I have no opinion, but I do like the mediocrity in which shares have been mired. It’s that kind of mediocrity that creates a stream of option premiums and, in the case of Cisco, dividends, as well. With the string of disappointments continued at last week’s earnings report, Cisco did announce another dividend increase while it recovered from much of the drop that it sustained at first.

I’m never quite certain why I like Whole Foods (WFM). What this winter season has shown is that many people are content to stay at home any eat whatever gluten they can find rather than brave the elements and visit a local store for the healthier things in life. I think Whole Foods is now simply making the transition from growth stock to boring stock. If that is the case I expect to be owning it more often as with boring comes that price predictability that appeals to me so much.

This week’s potential dividend trades are a disparate group if you ignore that they have all under-performed the S&P 500 since its peak.

General Electric (GE) is just one of those perfect examples of being in the wrong place at the wrong time and perhaps not being in the right place at the right time. Much of General Electric’s woes when the market was crumbling in 2008 was its financial services group. Since the market bottom its shares have outperformed the S&P 500 by more than 50%, as GE has taken steps to reduce its financial services portfolio. Unfortunately that means that it won’t be in a position to benefit from any rising interest rate environment as can reasonably be expected to be in our future.

Still, coming off its recent price decline and offering a strong dividend this week its shares look inviting, even if only for a short term holding.

L Brands (LB) along with most of the rest of the retail sector hasn’t been reflective of a strong consumer economy. Having recovered about 50% of its recent fall and going ex-dividend this coming week I’m ready to watch it recover some more lost ground as its specialty retailing has appeared to have greater resilience than department store competitors. 

Transocean (RIG) still hasn’t recovered from its recent ratings cut from “sector outperform” to “sector perform.” I’ve never understood the logic of that kind of  assessment, particularly if the sector may still be in a position to outperform the broad market. However, equally hard to understand is the reaction, especially when the entire sector goes down in unison in response. Subsequently Transocean also received an outright “sell” recommendation and has been mired near its two year lows.

With a very healthy ex-dividend date this week I may have renewed interest in adding shares. While he has been quiet of late, at its latest disclosure, Icahn Enterprises (IEP) owned approximately 6% of Transocean and to some degree serves as a floor to share price, as does the dividend which is scheduled to increase to $3 annually.

However, as with L Brands, which also reports earnings on February 26, 2104, I would also consider an exit or rollover strategy for those that may want to mitigate earnings related risk that will present itself. Such strategies may include closing out the position below the purchase price or rolling over to a March 2014 option in order to have some additional time to ride out any storms.

There’s really not much reason to take sides in the validity of claims regarding the nature of Herbalife (HLF). It has certainly made for amusing theater, as long as you either stayed on the sidelines or selected the right side. With the recent suggestion that some on the long side of the equation have been selling shares this week’s upcoming earnings release may offer some opportunity, as shares have already fallen nearly 16%.

While the option market is only implying a 7.2% move in share price, the sale of a put can return a weekly 1% ROI even at a strike price 13.7% below the current price. That is about the largest cushion I recall seeing and does look appealing for those that may have an inclination to take on risk. I’m a little surprised of how low the implied price movement appears to be, however, the surprise is answered when seeing how unresponsive shares have been the past year upon earnings news.

Also reporting earnings this week is Groupon (GRPN), a stock that has taken on some credibility since replacing its one time CEO, who never enjoyed the same cycle of adulation and disdain as did John Chambers. While the “Daily Deal” space is no longer one that gets much attention, Groupon has demonstrated that all of the cautionary views warning of how few barriers to entry existed, were vacuous. Where there were few barriers were to exit the space. 

In the meantime the options market is predicting a 13.9% move related to earnings, while a weekly 1.3% ROI could possibly be achieved with a price movement of less than 19%. While that kind of downward move is possible, there is some very strong support above there.

Finally, there is the frustration of owning AIG (AIG) at the moment. The frustration comes from watching for the second successive earnings report shares climb smartly higher in the after-hours and then completely reverse direction the following day. I continue to believe that its CEO, Robert Benmosche is something of a hero for the manner in which he has restored AIG and created an historical reference point in the event anyone ever questions some future day bailout of a systemically vital company.

None of that hero worship matters as far as any proposed purchased this coming week. However, shares may be well priced and in a sector that’s ready for some renewed interest.

Traditional Stocks: AIG, Cisco, MetLife, Whole Foods

Momentum Stocks: Mosaic

Double Dip Dividend: General Electric (ex-div 2/20), L Brands (ex-div 2/19), Transocean (ex-div 2/19)

Premiums Enhanced by Earnings: Groupon (12/20 PM) , Herbalife (2/18 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 – December 1, 2013

We may be on the verge of the Eve of Inflection.

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you’ve been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn’t escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It’s not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is “laissez les bon temps rouler.”

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week’s durable goods orders report didn’t necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don’t believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren’t appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical’s dividend offers some protection during a market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share’s volatility.

Finally, it’s yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst’s cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That’s an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend: AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

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 – November 3, 2013

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 AM)

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

Weekend Update – July 7, 2013

Much has been made of the recent increase in volatility.

As someone who sells options I like volatility because it typically results in higher option premiums. Since selling an option provides a time defined period I don’t get particularly excited when seeing large movements in a share’s price. With volatility comes greater probability that “this too shall pass” and selling that option allows you to sit back a bit and watch to see the story unwind.

It also gives you an opportunity to watch “the smart money” at play and wonder “just how smart is that “smart money”?

But being a observer doesn’t stop me from wondering sometimes what is behind a sudden and large movement in a stock’s price, particularly since so often they seem to occur in the absence of news. They can’t all be “fat finger ” related. I also sit and marvel about entire market reversals and wildly alternating interpretations of data.

I’m certain that for a sub-set there is some sort of technical barrier that’s been breached and the computer algorithms go into high gear. but for others the cause may be less clear, but no doubt, it is “The Smart Money,” that’s behind the gyrations so often seen.

Certainly for a large cap stock and one trading with considerable volume, you can’t credit or blame the individual investor for price swings, especially in the absence of news. Since for those shares the majority are owned by institutions, which hopefully are managed by those that comprise the “smart money” community, the large movements certainly most result in detriment to at least some in that community.

But what especially intrigues me is how the smart money so often over-reacts to news, yet still can retain their moniker.

This week’s announcement that there would be a one year delay in implementing a specific component of the Affordable Care Act , the Employer mandate, resulted in a swift drop among health care stocks, including pharmaceutical companies.

Presumably, since the markets are said to discount events 6 months into the future, the timing may have been just right, as a July 3, 2013 announcement falls within that 6 month time frame, as the changes were due to begin January 1, 2014.

By some kind of logic the news of the delay, which reflects a piece of legislation that has regularly alternated between being considered good and bad for health care stocks, was now again considered bad.

But only for a short time.

As so often is seen, such as when major economic data is released, there is an immediate reaction that is frequently reversed. Why in the world would smart people have knee jerk reactions? That doesn’t seem so smart. This morning’s reaction to the Employment Situation report is yet another example of an outsized initial reaction in the futures market that saw its follow through in the stock market severely eroded. Of course, the reaction to the over-reaction was itself then eroded as the market was entering into its final hour, as if involved in a game of volleyball piting two team of smart money against one another.

Some smart money must have lost some money during that brief period of time as they mis-read the market’s assessment of the meaning of a nearly 200,000 monthly increase in employment.

After having gone to my high school’s 25th Reunion a number of years ago, it seemed that the ones who thought they were the most cool turned out to be the least. Maybe smart money isn’t much different. Definitely be wary of anyone that refers to themselves as being part of the smart money crowd.

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

As a caveat, with Earnings Season beginning this week some of the selections may also be reporting their own earnings shortly, perhaps even during the July 2013 option cycle. That knowledge should be factored into any decision process, particularly since if you select a shorter term option sale that doesn’t get assigned, since yo may be left with a position that is subject to earnings related risk. By the same token, some of those positions will have their premiums enhanced by the uncertainty associated with earnings.

Both Eli Lilly (LLY) and Abbott Labs (ABT) were on my list of prospective purchases last week. Besides being a trading shortened week in celebration of the FOurth of July, it was also a trade shortened week, as I initiated the fewest new weekly positions in a few years. Both shares were among those that took swift hits from fears that a delay in the ACA would adversely impact companies in the sector. In hindsight, that was a good opportunity to buy shares, particularly as they recovered significantly later in the day. Lilly is well off of its recent highs and Abbott Labs goes ex-dividend this week. However, it does report earnings during the final week of the July 2013 option cycle. I think that healthcare stocks have further to run.

AIG (AIG) is probably the stock that I’ve most often thought of buying over the past two years but have too infrequently gone that path. While at one time I thought of it only as a speculative position it is about as mainstream as they come, these days. Under the leadership of Robert Ben Mosche it has accomplished what no one believe was possible with regard to paying back the Treasury. While its option premiums aren’t as exciting as they once were it still offers a good risk-reward proposition.

Despite having given up on “buy and hold,” I’ve almost always had shares of Dow Chemical (DOW) over the past 5 years. They just haven’t been the same shares for very long. It’s CEO, Andrew Liveris was once the darling of cable finance news and then fell out of favor, while being roundly criticized as Dow shares plummeted in 2008. His star is pretty shiny once again and he has been a consistent force in leading the company to maintain shares trading in a fairly defined channel. That is an ideal kind of stock for a covered call strategy.

The recent rise in oil prices and the worries regarding oil transport through the Suez Canal, hasn’t pushed British Petroleum (BP) shares higher, perhaps due to some soon to be completed North Sea pipeline maintenance. British Petroleum is also a company that I almost always own, currently owning two higher priced lots. Generally, three lots is my maximum for any single stock, but at this level I think that shares are a worthy purchase. With a dividend yield currently in excess of 5% it does make it easier to make the purchase or to add shares to existing lots.

General Electric (GE) is one of those stocks that I only like to purchase right after a large price drop or right before its ex-dividend date. Even if either of those are present, I also like to see it trading right near its strike price. Its big price drop actually came 3 weeks ago, as did its ex-dividend date. Although it is currently trading near a strike price, that may be sufficient for me to consider making the purchase, hopeful of very quick assignment, as earnings are reported July 19, 2013.

Oracle (ORCL) has had its share of disappointments since the past two earnings releases. Its problems appear to have been company specific as competitors didn’t share in sales woes. The recent announcement of collaborations with Microsoft (MSFT and Salesforce.com (CRM) says that a fiercely competitive Larry Ellison puts performance and profits ahead of personal feelings. That’s probably a good thing if you believe that emotion can sometimes not be very helpful. It too was a recent selection that went unrequited. Going ex-dividend this week helps to make a purchase decision easier.

This coming week and next have lots of earnings coming from the financial sector. Having recently owned JP Morgan Chase (JPM) and Morgan Stanley (MS) I think I will stay away from those this week. While I’ve been looking for new entry points for Citigroup (C) and Bank of America (BAC), I think that they’re may be a bit too volatile at the moment. One that has gotten my attention is Bank of New York Mellon (BK). While it does report earnings on July 17, 2013 it isn’t quite as volatile as the latter two banks and hasn’t risen as much as Wells Fargo (WFC), another position that I would like to re-establish.

YUM Brands (YUM) reports earnings this week and as an added enticement also goes ex-dividend on the same day. People have been talking about the risk in its shares for the past year, as it’s said to be closely tied to the Chinese economy and then also subject to health scare rumors and realities. Shares do often move significantly, especially when they are stoked by fears, but YUM has shown incredible resilience, as perhaps some of the 80% institutional ownership second guess their initial urge to head for the exits, while the “not so smart money” just keeps the faith.

Finally, one place that the “smart money” has me intrigued is JC Penney (JCP). With a large vote of confidence from George Soros, a fellow Hungarian, it’s hard to not wonder what it is that he sees in the company, after all, he was smart enough to have fled Hungary. The fact that I already own shares, but at a higher price, is conveniently irrelevant in thinking that Soros is smart to like JC Penney. In hindsight it may turn out that ex-CEO Ron Johnson’s strategy was well conceived and under the guidance of a CEO with operational experience will blossom. I think that by the time earnings are reported just prior to the end of the August 2013 option cycle, there will be some upward surprises.

Traditional Stocks: Bank of New York, British Petroleum, Dow Chemical, Eli Lilly, General Electric,

Momentum Stocks: AIG, JC Penney

Double Dip Dividend: Abbott Labs (ex-div 7/11), Oracle (ex-div)7/10)

Premiums Enhanced by Earnings: YUM Brands (7/10 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

   

Weekend Update – April 7, 2013

I’m was beginning to feel like one of those Pacific Island soldiers that never found out World War II had ended and remained ever-presently vigilant for an impending attack that never came.

Amazingly, some held up their vow to defend for decades while I’m having difficulty after a bit more than a month waiting for a correction. Nothing big, just in line with this same time period in 2012, as I see lots of similarities to that time, not only in the parallel nature of the charts, but also in my own less than stellar performances, having been selling covered options as religiously as a sentinel keeps an eye on the horizon.

Having weathered the acute shock value of Cyprus, decreasing economic growth in China, currency manipulation in Japan and digested the initial uncertainty of the Korean Peninsula, it looked as if any sentinel for a sell-off would be a lonely soldier.

Now faced with a disappointing employment situation there’s opportunity to wonder over the weekend whether the pole has been sufficiently greased or whether this is simply the very quick mini sell-off of April 2012 that occurred just as Apple (AAPL) hit its high, then quickly recovered, just in time to lead to a 9% sell-off.

Apple had came off its April high by 5% at that point that the greater market downturn began, which is that same point that Google (GOOG) was down from its recent high point, at the close of Thursday’s trading (April 4, 2013). Coincidentally, that was the day before today’s sell-off. For those that have believed that Google has rotated into market leadership, having wrestled the position away from Apple, that may be a cause for concern. as does the fact that Google has traded below that dreaded 50 Day Moving Average.

I don’t know much about those kind of technical factors, but I do recognize that sometimes there is a basis for deja vu being more than just a feeling. What actually exists over the horizon is still anyone’s guess, but unlike those lonely soldiers you can feel relatively assured that at some point an unwelcome visitor will appear and wreak some havoc on the market. From my perspective that comes along every 52 months, so I’m not quite ready to accept that the time has come to drop defenses, but there may be room to let the guard down a bit.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories, as earnings season begins anew on April 8, 2013 (see details). Additionally, for the first time in a few weeks there is a somewhat greater emphasis on Momentum stocks, as a coming downslide might reasonably be expected to unduly impact upon issues that have thrived recently, particularly the more defensive stocks. However, I am still inclined to consider monthly contracts over weekly ones, simply for a little extra breathing room while continuing to await a market heading in a southerly direction.

One Momentum stock that has also thrived up until very recently is YUM Brands (YUM). It also happens to go ex-dividend this week and has already given back much of its gains in the absence of any news. In the past it has demonstrated itself very capable of bouncing back from both real news and speculation regarding its forward prospects. Simultaneously being held hostage to the Chinese economy and also proving to be independent of swirling winds, YUM Brands serves as a model of what can be achieved in a marketplace where the playing field is anything but level.

A real signal that something is evolving, at least from my perspective, is that I no longer classify AIG (AIG) as a Momentum stock. Over the past year, had I followed by frequent suggestions that AIG might be an appropriate covered call position, I think I could have limited my portfolio to a single stock. Robert Ben Mosche, it’s CEO is the poster child for leadership and focus. With some recent share weakness, I think it may be time to add it back to a portfolio in need of income and reasonable price stability.

A couple of months ago I made an earnings related trade in F5 Networks (FFIV) that worked out nicely. Having sold puts just prior to earnings, F5 surpassed expectations and the trade was closed in 4 days. Thursday evening after the closing bell, F5 release disappointing guidance that saw its shares fall more than 15%.

I hate guidance that comes out weeks before earnings and catches me off-guard. In the past I’ve seen Cummins Engine (CMI) and Abercrombie and Fitch (ANF) seem to regularly upset happy shareholders with that kind of timed guidance. Despite the fact that analysts seem to be in agreement that this is solely an F5 issue, it indiscriminately drags down the sector, perhaps offering opportunities.

In this case, I think the opportunities are now in both Cisco (CSCO) and Riverbed Technology (RVBD), both unduly hit in the aftermath of F5 and just a couple of weeks ago by Oracle’s (ORCL) disappointing earnings, which were also agreed to be an Oracle specific shortcoming. I currently own shares of Riverbed and would even consider adding to the position ahead of earnings later in the month.

Western Refining (WNR) returns to the list from last week, as an unrequited purchase. It is, possibly another example of how the market acts indiscriminately and emotionally. Following Valero’s (VLO) moaning about the costs of upcoming EPA initiatives for cleaner gas the market punished the entire sector, despite the fact that the EPA suggested that the costs of compliance were minimal for most refiners. The market made no distinction and assumed that all refiners would be subject to additional costs similar to the $300-400 million suggested by Valero. Unfortunately, I didn’t have the fortitude to pick up shares of Western Refining as it briefly dipped below $30 or Phillips 66 (PSX) as it fell about 10%. It didn’t stay there very long and certainly never confirmed the worst case scenario that Valero so openly shouted.

MetLife (MET) also returns from last week, which was another week of hesitancy to commit cash in favor of building reserves. There were, however, a number of times that I was ready to part with some of the cash, but ultimately resisted. As opposed to Western Refining, MetLife’s shares went down even further, so those decisions to embrace inaction may have balanced one another out. I continue to believe that shares will benefit from an increasingly healthy housing market, although that is far from MetLife’s core and highest profile business.

The financial sector was hit quite hard this past week. Since I owned shares of both Morgan Stanley (MS) and JP Morgan (JPM), I was acutely aware of their duress. However, in addition to JP Morgan and Wells Fargo (WFC) releasing earnings this Friday and perhaps representing some opportunity, Bank of America (BAC), whose shares I had assigned just a week ago has given up much of its recent run-up higher and is becoming attractive again.

Finally, Bed Bath and Beyond (BBBY) s one of my favorite stores, but not one of my favorite stocks. It has had a bit of a price rise on some buy-out speculation and it has demonstrated past ability to disappoint on earnings. Already down about 4% from its very recent high, I would be comfortable owning shares at $60 and would consider a 1.5% ROI for a 2 week holding period to be a decent reward while anticipating less than a 5% decline in share price in the after-math of earnings.

Traditional Stocks: AIG, Cisco, MetLife

Momentum Stocks: Bank of America, Riverbed Technology, Western Refining,

Double Dip Dividend: YUM Brands (ex-div 4/10)

Premiums Enhanced by Earnings: JP Morgan (4/12 AM), Pier 1 (4/11 AM), Wells Fargo (4/12 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Weekend Update – January 27, 2013

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Weekend Update – January 13, 2013

Your portfolio is your Preidential Cabinet.

In a week when the biggest story was the signature of the man selected by President Obama to succeed Timothy Geithner as Treasury Secretary it’s not too surprising that not much happened in the markets.

After more than a 4% gain the prior week a breather was welcome., as shares assigned from my portfolio must have felt as if they had outstayed their welcome.

They hadn’t, but sometimes it’s just time to leave.

The week was a busy one in Executive Office politics as it was the time honored tradition of appointed cabinet officials knowing that it was time to leave . The week demonstrated a strategy to fill cabinet positions that many are finding to be uncomfortable. Some people like the security that comes with known names and entities, while others relish in the unknown and “out of the box” thinkers..

Professional sports is like the former. How else can you explain the consistent recycling of proven losers, while promising new leaders go languishing as they await an opportunity to strut their stuff and lead their teams to victory?

As opposed to the process of assembling a Presidential cabinet under George W. Bush when every face was a very hackneyed and familiar one, this week’s events were quite the opposite, as the choices ranged from the unknown to the disliked. Norv Turner may have qualified for an appointment in the Bush Administration, but not here and not now.

What could confidently be said about Jack Lew, the Treasury Secretary designee, is that his signature suggests that he would be comfortable working together with Federal Reserve Chairman Bernanke and add a few extra “zeroes” to the money supply. After all, why stop at just a Trillion Dollar Coin? It’s like 5 minute Abs.

President Obama’s cabinet during his first term was noted for its infrequent turnover and familiar names. That’s how my portfolios used to be and I can’t necessarily complain about its performance. The portfolio was always comprised of well known names, never any speculative issues and they all stayed a long time, through good and bad performance, then good performance and then bad performance, again and again.

As Secretary of Labor Hilda Solis announced her departure, ostensibly lured by an irresistible Herbalife (HLF) ethnocentric marketing campaign, Raymond LaHood is one of the few leftovers and he should stay just for the humorous name.

That’s not a good enough criterion for stocks, though. These days, I like rapid turnover, but still only have comfort with familiar names. I too may have chosen Donald Rumsfeld, but likely would have been a little distressed if he had not departed within 40 days, or so. I like a portfolio that is more of a sleep-over than a relationship.

After veering significantly from last week’s script in an effort to find lots of replacements for assigned shares, I’m again faced with needing lots of replacements, but at least this past week the overall market wasn’t terribly difficult to top. Think of it as having to find a replacement for Treasury Secretary John Snow. Henry Paulson was pretty good in his own right, but by comparison he really shined.

Still, the challenge of finding potential candidates that aren’t at or near 52 week highs is difficult. Normally, my list is comprised of the same old and reliable names, but this week there are some newcomers that hopefully will get a chance to strut their stuff and then be gone before outwearing their welcome. That’s especially on my mind this week as a number offer only monthly option contracts. I tend to be more willing to consider those stocks in the final week of a monthly cycle, but if they’re not assigned that starts preparing the way to push the 40 day envelope.

As usual, stocks are categorized as either being Traditional, Momentum, Double, Dip Dividend or PEE (see details). As earnings season goes into full gear this week there were actually a large number of candidates to consider for earnings related trades, but often the best opportunities come with some of the lesser known or higher flying names than with the button down early reporters.

I’m not certain that I know anyone that would admit to having, much less using a Discover credit card. I still spend a good portion of my time trying to find a place that will allow me to decide between my Diners Club or Discover. Yet Discover FInancial (DFS) is a reasonable alternative to Visa (V) and MasterCard (MA). Although Discover has outperformed its more respected cousins in the past year, it has greatly under-performed in the past month.

DuPont (DD) used to be one of my favorites. That was back in the days when there were no weekly options, it had an artificially high dividend and great option premiums. These days, I’m not quite as enthused, as the years have taken their toll. But during the last week of an option cycle? Why not? Besides, with all of the portfolio new comers, it’s good to have a familiar face or two to keep things grounded.

Speaking of grounds, Starbucks (SBUX), although higher than the last time I owned it, just a few months ago, appears to be running on all cylinders. I’m not certain that anyone knows and understands his company as well as Howard Schultz understands Starbucks. Even in the face of a negative earnings report two quarters ago, Schultz effused so much confidence in responding to the market’s reflexive response to “bad” news, that you had to be inspired about the company’s prospects.

These days, I’m not certain that I should still categorize AIG (AIG) along with my other “Momentum” stocks. Its option premiums are less and less like those of others in that category. AIG is a stock that I often wish I had read my own weekly words and bought much more frequently than I had done. Along the lines of inspiration, every time I see its CEO, Robert BenMosche on air, I think that he is truly a hero of American business and finance. Instead of remembering the villains, we should laud the heroes.

US Steel (X) could be one of my newcomer stocks this week. I don’t have any particular thesis. I simply like the premium, but am respectful of the risk. US Steel does report earnings on January 29, 201 and am not certain that I would want to be holding shares going into earnings. Since it does trade a weekly option, there would be at least two escape opportunities prior to earnings.

Yahoo! (YHOO) is another stock that I haven’t owned in a while, having waited for its return to $16. Following its drop this past week I feel a bit more comfortable considering a purchase after its resurrection.

Footlocker (FL) is another one of the new comers that doesn’t necessarily inspire me on the basis of any underlying theme. Like Us Steel it has a nice option premium, but only trades a monthly option. The upcoming dividend may tip the scales for me as the stock hasn’t had the same kind of run-up that its products should equip the owner for.

Lowes (LOW), for all of its commendable performance, is a stock that I only look toward as it approaches its ex-dividend date. It too offers only a monthly option, but like Foot Locker, going ex-dividend in the final week of the monthly option cycle makes ownership more palatable.

eBay (EBAY) is another stock that I own too infrequently. That may change as it’s come over to the weekly options family. It reports earnings this week and will likely be as good as its PayPal division allows it to be. It’s no longer the highly volatile stock of yesterday, but still offers a reasonable risk-reward ratio in the same 5% range on strike price.

Having missed the entire move in the entire housing sector doesn’t preclude entry, it just includes risk. Lennar (LEN) will report earnings this coming week and I expect a break in its upward trajectory. In the past its shares have not over-responded to earnings news, so the risk reward may be present at the 5% level, rather than the 10% level that I often find comfort in. If prices hold up prior to earnings release and I can obtain a 1% premium for selling a put at a strike 5% below the current price or selling an in the money call at a similar strike, this may be a good candidate for a short term dalliance.

Traditional Stocks: Discover Financial, DuPont, Starbucks

Momentum Stocks: AIG, US Steel, Yahoo!

Double Dip Dividend: Foot Locker (ex-div 1/16), Lowes (ex-div 1/18)

Premiums Enhanced by Earnings: eBay (1/16 PM), Lennar (1/15 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.