Weekend Update – March 13, 2016

While most see virtually no chance of an interest rate increase announcement at this week’s FOMC meeting, it is expected that a June or July rate hike has a 50% chance of occurrence.

Stock market investors may like certainty, but traders often like the volatility that arises from uncertainty.

In this case, however, as there may be increasing certainty of a rate hike, time may be running out for traders who have generally reveled in a low rate environment and lashed out when threatened with rate increases.

For one group time may be running out, but for another their time may be coming. That could make the next 3 months interesting as positioning one’s self for advantage in anticipation of events may be a reasonable idea.

That’s not to say, though, that the past 3 months haven’t been interesting and haven’t offered opportunities for re-positioning. So far, 2016 has been a tale of two markets, with a sharp dividing line at February 11th.

The week’s spike in the 10 Year Treasury Note still leaves market determined interest rates far from where they were as 2016 got started. The same is true for 30 Year Daily Mortgage Rates rates as such arcane issues as “supply and demand” can end up doing the FOMC’s work and by the time June rolls around we may all be wondering what they had been waiting for.

Of course, the same was appearing to be the case just a few months ago, but then the lack of strong evidence of an environment that might have warranted the FOMC’s interest rate increase decision may have given traders new life.

That may explain the nearly 10% market jump in the past month that has almost erased the 2016 loss up until that point.

Or for those technicians who may be agnostic as to events going on around them, they may point at Bollinger Bands and the 50 Day Moving Average. For them, February 11th and 29th may have been the key moments in defining the market’s next move, regardless of what headlines may have been appearing,

Either of those explanations for the market’s sudden rise is far easier to understand than it simply following the price of oil higher.

One has to wonder how much time is left for that association to continue to play out. While there had been some disagreement over what relative roles supply and demand may have played in oil’s price descent, there’s increasing agreement that decreasing demand was not the driver in the dynamic.

Yet markets have reacted as if the price of oil was being predicated purely by demand. While it made little sense for a broad stock market decline as supply driven oil price decreases were unfolding, it doesn’t get any better by stocks moving higher in tandem with oil.

Time may also be running out for the illogical response to the changes in the price of oil, particularly if its ascent  continues. At some point, maybe that surfeit of energy will cause a light bulb to get powered someplace and to finally go on in someone’s head long enough to ask an obvious question or two.

Why the demand for stocks should rise as the price of oil does the same, whether supply or demand driven, is curious as that price increase only serves to sap profits and the consumer’s discretionary cash pile.

I’ve been happy to see the stock market’s recovery in the past 30 days, but as supply and demand may be somewhat arcane, there is another general law that may have some application.

What goes up must come down.

Unless your own personal time is really running out, we’re all destined to see gravity return sooner or later, even as it has been suspended for the past few weeks.

If you have more time remaining than most then you’ll be chagrined to see the same over and over again only to come to the realization that from an investing point of view, time never really runs out.

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

As so much attention is placed on oil and interest rates, it was actually nice to see a stock like Pfizer (PFE), discussed last week, actually move up on pertinent news.

However, it wasn’t the specter of pertinent news that put some focus on Pfizer. Instead it was more of a case of looking at stocks and sectors that had been left behind in the market’s move higher.

Add Astra Zeneca (AZN) to that list.

Astra Zeneca isn’t a stranger to being left out of the limelight and its less than desirable liquidity in the options market is one reflection of that relative anonymity and one reason that I don’t consider its purchase very often.

However, it appears as if it is developing some reasonable support at the $29 level and with an equally reasonable premium it is a stock that I wouldn’t mind holding for a longer period of time, particularly if that came as a result of frequent rollovers of the weekly options.

Given the low volume of options trading in Astra Zeneca, it was noticeable that a relatively large out of the money position traded with a 4 month time frame, which would encompass next month’s earnings, but not that of the subsequent quarter.

The expectation, given the expanded open interest of the $32.50 and $35 calls and in a volume far greater than those of July 2016 put contracts, is that some significant move higher awaits.

If Astra Zeneca can trade at the $29-$30 level for some time until July, I would be more than happy to serially collect the option premiums, even if to see shares ultimately assigned following the anticipated price surge.

GameStop (GME) is a company that has spent years fighting the conviction of so many, particularly those making it one of the most popular stocks to short, that it’s time was running out.

Somehow, GameStop has consistently been able to prove the long term thesis to be wrong, even as it has periodically gone through some downward paroxysms that may have regarded well time short sales of the stock.

The most recent strategic challenge came about 2 years ago when Wal-Mart (WMT) announced that it  would start buying back used games for store credits.

In the “Where Are They Now?” department, Wal-Mart is still buying back games, but price sensitive gamers may still find that GameStop is the place to take their business.

GameStop is usually a company that I prefer to explore through the sale of puts. Its premium always reflects the chance that the bottom could fall out anytime soon and earnings will be reported on March 24th, with expectations of $2.25/share earnings on what I consider a staggering $3.6 Billion on the quarterly top line.

Not too bad for a dinosaur whose time has repeatedly run out.

Another whose time may be running out is Williams Companies (WMB) in its merger with Energy Transfer Equity LP (ETE). In what has already been a very rocky road, the pock marks became more clear as an SEC filing indicated that Energy Transfer Equity had carried out a private offering of convertible shares to a select group of investors, in order to finance the merger.

Williams Companies was reportedly not satisfied with the transaction which it believed was too costly wand would dilute shares.

The arbitrage community took note of the increasing divergence between Williams’ market price and that which was being offered in the merger, as an increasing likelihood of the deal not being consummated.

If you can bear some significant drama and maybe some significant trauma in a sector that already has plenty of its own, without the need for a side show, this is the place to be.

With a weekly ROI of approximately 5%  if an at the money call option is sold a few weeks of continued clashing between Williams and Energy Transfer Partners could result in significant accumulation of premium.

Interestingly, the options market seems to be more optimistic, at least for the coming week, at least not believing that a complete breakdown is in the near future.

With a beta of 3.5, there’s not too much doubt that establishing any kind of position in Williams Companies might just be the very definition of insanity.

Finally, there are actually various definitions of what may constitute insanity. 

After having owned shares of Las Vegas Sands (LVS) on many occasions over the past few years, I’m still sitting on two lots of shares at much higher prices and am looking forward to being extricated. At the same time, though, I’m thinking of adding shares.


On the one hand, you might define insanity as having funded the Newt Gingrich effort for pre-eminence in the 2012 Republican primaries to the tune of $100 million or more.

On yet another hand, given the volatility in Macao and the ability of the Chinese government to create or destroy opportunity by simple edict, along with the ability to present economic reports to suit the needs of the moment, insanity may be the decision to purchase more shares of Las Vegas Sands.

Or perhaps insanity may be deciding to increase your dividend by 30% after your shares had fallen by almost 40%.

Still, no one has called Sheldon Adelson insane, as there is undoubtedly lots and lots of method behind his decisions, particularly the use of the dividend to support his own interests. That makes me suspect that the current 119% payout ration doesn’t require a red flag to be raised.

With a $0.72 dividend representing a 5.6% yield, I might be willing to cede that dividend and accept early assignment of shares if selling calls, simply to get the premium, which represents some reward for the insanity of purchasing shares.

At the age of 82, Adelson gives no suggestion of time running out, even as a man who knows the odds as well as anyone.

For now, I think that dividend is safe and even with a significant decline in price from here, perhaps to the $45 level, the premiums still offer enough opportunity to offset that risk, but in such an event, it may be nice to let someone pay you for the time it could take for the share price to recover.

Luckily, with options, time never really has to run out if you’re doing the selling.

Traditional Stocks: Astra Zeneca

Momentum Stocks: GameStop, Williams Companies

Double-Dip Dividend:  Las Vegas Sands (3/18 $0.72)

Premiums Enhanced by Earnings: none

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



Weekend Update – August 9, 2015

In an age of rapidly advancing technology, where even Moore’s Law seems inadequate to keep up with the pace of advances, I wonder how many kids are using the same technology that I used when younger.

It went by many names, but the paper “fortune teller” was as good a tool to predict what was going to happen as anything else way back then.

Or now.

It told your fortune, but for the most part the fortunes were binary in nature. It was either good news that awaited you later in life or it was bad news.

I’m not certain that anything has actually improved on that technology in the succeeding years. While you may be justified in questioning the validity of the “fortune teller,” no one really got paid to get it right, so you could excuse its occasional bad forecasting or imperfect vision. You were certainly the only one to blame if you took the results too seriously and was faced with a reality differing from the prediction.

The last I checked, however, opinions relating to the future movements of the stock market are usually compensated. Those compensations tend to be very generous as befitting the rewards that may ensue to those who predicate their actions on the correct foretelling of the fortunes of stocks. However, since it’s other people’s money that’s being put at risk, the compensations don’t really reflect the potential liability of getting it all wrong.

Who would have predicted the concurrent declines in Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) that so suddenly placed them into correction status? My guess is that with a standard paper fortune teller the likelihood of predicting the coincident declines in Disney and Apple placing them into correction status would have been 12.5% or higher.

Who among the paid professionals could have boasted of that kind of predictive capability even with the most awesome computing power behind them?

If you look at the market, there really is nothing other than bad news. 200 Day Moving Averages violated; just shy of half of the DJIA components in correction; 7 consecutive losing sessions and numerous internal metrics pointing at declining confidence in the market’s ability to move forward.

While this past Friday’s Employment Situation Report provided data that was in line with expectations, wages are stagnant If you look at the economy, it doesn’t really seem as if there’s the sort of news that would drive an interest rate decision that is emphatically said to be a data driven process.

Yet, who would have predicted any of those as the S&P 500 was only 3% away from its all time highs?

I mean besides the paper fortune teller?

Seemingly paradoxical, even while so many stocks are in personal correction, the Volatility Index, which many look at as a reflection of uncertainty, is down 40% from its 2015 high.

As a result option premiums have been extraordinarily low, which in turn has made them very poor predictors of price movements of late, as the implied move is based upon option premium levels.

Nowhere is that more obvious than looking at how poorly the options market has been able to predict the range of price movements during this past earnings season.

Just about the only thing that could have reasonably been predicted is that this earnings season who be characterized by the acronym “BEMR.”

“Beat on earnings, missed on revenues.”

While a tepid economy and currency exchange have made even conservative revenue projections difficult to meet, the spending of other people’s money to repurchase company shares has done exactly what every CEO expected to be the case. Reductions in outstanding shares have boosted EPS and made those CEOs look great.

Even a highly p[aid stock analyst good have predicted that one.

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

Not too surprisingly after so many price declines over the past few weeks, so many different stocks look like bargains. Unfortunately, there’s probably no one who has been putting money at risk for a while who hasn’t been lured in by what seemed to be hard to resist prices.

It’s much easier to learn the meaning of “value trap” by reading about it, rather than getting caught in one.

One thing that is apparent is that there hasn’t been a recent rush by those brave enough to “buy on the dip.” They may simply be trading off bravery for intelligence in order to be able to see yet another day.

With my cash reserves at their lowest point in years, I would very much like to see some positions get assigned, but that wish would only be of value if I could exercise some restraint with the cash in hand.

One stock suffering and now officially in correction is Blackstone (NYSE:BX). It’s descent began with its most recent earnings report. The reality of those earnings and the predictions for those earnings were far apart and not in a good way.

CEO Schwarzman’s spin on performance didn’t seem to appease investors, although it did set the tone for such reports as “despite quarterly revenues and EPS that were each 20% below consensus. That consensus revenue projection was already one that was anticipating significantly reduced levels.

News of the Blackstone CFO selling approximately 9% of his shares was characterized as “unloading” and may have added to the nervousness surrounding the future path of shares.

But what makes Blackstone appealing is that it has no debt on its own balance sheet and its assets under management continue to grow. Even as the real estate market may present some challenges for existing Blackstone properties, the company is opportunistic and in a position to take advantage of other’s misery.

Shares command an attractive option premium and the dividend yield is spectacular. However, I wouldn’t necessarily count on it being maintained at that level, as a look at Blackstone’s dividend payment history shows that it is a moving target and generally is reduced as share price moves significantly lower. The good news, however, is that shares generally perform well following a dividend decrease.

Joining Blackstone in its recent misery is Bed Bath and Beyond (NASDAQ:BBBY). While it has been in decline through 2015, its most recent leg of that decline began with its earnings report in June.

That report, however, if delivered along with the most recent reports beginning a month ago, may have been met very differently. Bed Bath and Beyond missed its EPS by 1% and met consensus expectations for revenue.

Given, however, that Bed Bath and Beyond has been an active participant in share buybacks, there may have been some disappointment that EPS wasn’t better.

However, with more of its authorized cash to use on share buy backs, Bed Bath and Beyond has been fairly respectful in the way it uses other people’s money and has been more prone to buying shares when the stock price is depressed, in contrast to some others who are less discriminating. As shares are now right near a support level and with an option premium recognizing some of the uncertainty, these shares may represent the kind of value that one of its ubiquitous 20% of coupons offers.

The plummet is Disney shares this week following earnings is still somewhat mind boggling, although short term memory lapses may account for that, as shares have had some substantial percentage declines over the past few years.

Disney’s decline came amidst pervasive weakness among cable and content providers as there is a sudden realization that their world is changing. Words such as “skinny” and “unbundling” threaten revenues for Disney and others, even as revenues at theme parks and movie studios may be bright spots, just as for Comcast (NASDAQ:CMCSA).

As with so many other stocks as the bell gets set to ring on Monday morning, the prevailing question will focus on value and relative value. Disney’s ascent beyond the $100 level was fairly precipitous, so there isn’t a very strong level of support below its current price, despite this week’s sharp decline. That may provide reason to consider the sale of puts rather than a buy/write, if interested in establishing a position. Additionally, a longer term time frame than the one week that I generally prefer may give an opportunity to generate some income with relatively low risk while awaiting a more attractive stock price.

While much of the attention has lately been going to PayPal (NASDAQ:PYPL) and while I am now following that company, it’s still eBay (NASDAQ:EBAY) that has my focus, after a prolonged period of not having owned shares. Once a mainstay of my holdings and a wonderful covered option trade it has become an afterthought, as PayPal is considered to offer better growth prospects. While that may be true, I generally like to see at least 6 months of price history before considering a trade in a new company.

However, as a covered option trader, growth isn’t terribly important to me. What is important is discovering a stock that can have some significant event driven price movements in either direction, but with a tendency to predictably revert to its mean. That creates a situation of attractive option premiums and relatively defined risk.

eBay is now again trading in a narrow range after some of the frenzy associated with its PayPal spin-off, albeit the time frame for that assessment is limited. However, as it has traded in a relatively narrow range following the spin-off, the option premium has been very attractive and I would like to consider shares prior to what may be an unwanted earnings surprise in October.

Sinclair Broadcasting (NASDAQ:SBGI) reported earnings last week beating both EPS and revenue expectations quite handily. However, the market’s initial response was anything but positive, although shares did recover about half of what they lost.

Perhaps shares were caught in the maelstrom that was directed toward cable and content providers as one thing that you can predict is that a very broad brush is commonly used when news is at hand. But as a plebian provider of terrestrial television access, Sinclair Broadcasting isn’t subject to the same kind of pressures and certainly not to the same extent as their higher technology counterparts.

I often like to consider the purchase of shares just before Sinclair Broadcasting goes ex-dividend, which it will do on August 28th. However, with the recent decline, I would consider a purchase now and selling the September 18, 2015 option contract at a strike level that could generate acceptable capital gains in addition to the dividend and option premium, while letting the cable and content providers continue to take the heat.

It seems only appropriate on a week that is focused on an old time paper fortune teller that some consideration be given to International Paper (NYSE:IP) as it goes ex-dividend this week. With its shares down nearly 17% from their 2015 high, the combination of perceived value, very fair option premium and generous dividend may be difficult to pass up at this time, while having passed it up on previous occasions during the past month.

International Paper’s earnings late last month fell in line with others that “BEMR,” but it shares remained largely unchanged since that report and shares appear to have some price support at its current level.

You may have to take my word for it, but Astra Zeneca (NYSE:AZN) is going ex-dividend this week. That information didn’t appear in any of the 3 sources that I typically use and my query to its investor relations department received only an automated out of office response. The company’s site stated that a dividend announcement was going to be made when earnings were announced on July 30th, but a week after earnings the site didn’t reflect any new information. Fortunately,someone at NASDAQ knew what I wanted to know.

Astra Zeneca pays its dividends twice each year, the second of which will be ex-dividend this week and is the smaller of the two distributions, yet still represents a respectable 1.3% payment.

I already own shares and haven’t been disappointed by shares lagging its peers. What I have been disappointed in, however, has been it’s inability to mount any kind of sustained move higher and the inability to sell calls on those shares, particularly as there had been some liquidity issues.

The recent stock split, however, has ameliorated some of those issues and there appears to be some increased options trading volume and smaller bid-ask discrepancies. Until that became the case, I had no interest in adding shares, but am now more willing to do so, also in anticipation of some performance catch-up to its other sector mates.

The promise that seemed to reside with shares of Ali Baba (NYSE:BABA) not so long ago has long since withered along with many other companies whose fortunes are closely tied to the Chinese economy.

Ali Baba reports earnings this week and the option market is predicting only a 6.7% price move. That seems to be a fairly conservative assessment of the potential for exhilaration or the potential for despair. However, a 1% ROI through the sale of a weekly put option is not available at a strike that’s below the bottom of the implied range.

For that reason, I would approach Ali Baba upon earnings in the same manner as with Green Mountain Keurig’s (NASDAQ:GMCR) earnings report. That is to only consider action after earnings are released and if shares drop below the implied lower end of the range. There is something nice about letting others exercise a torrent of emotion and fear and then cautiously wading into the aftermath.

Finally, during an earnings season that has seen some incredible moves, especially to the downside, Cree (NASDAQ:CREE) should feel right at home. It has had a great habit of surprising the options market, which is supposed to be able to predict the range of a stock’s likely price move, on a fairly regular basis.

With its products just about every where that you look you would either expect its revenues and earnings to be booming or you might think that it was in the throes of becoming commoditized.

What Cree used to be able to do was to trade in a very stable manner for prolonged periods after an earnings related plunge and then recover much of what it lost as subsequent earnings were released. That hasn’t been so much the case in the past year and its share price has been in continued decline in 2015, despite a momentary bump when it announced plans to spin-off a division to “unlock its full value.”

The option market is implying a 9.4% move when earnings are announced this coming week. By historical standards that is a low estimation of what Cree shares are capable of doing. While one could potentially achieve a 1% weekly ROI at a strike price nearly 14% below Friday’s closing price, as with Ali Baba, I would wait for the lights to go out on the share’s price before considering the sale of short term put options.

Traditional Stocks: Bed Bath and Beyond, Blackstone, Disney, eBay, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Astra Zeneca (8/12 $0.45), International Paper (8/12 $0.40)

Premiums Enhanced by Earnings: Ali Baba (8/12 AM), Cree (8/11 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 7, 2014

Trying to listen to the President put forth some statistics regarding the employment situation in the United States this past week was difficult, as my attention was captured by the festive holiday backdrop.

Holding a prominent position next to our nation’s flag was what appeared to be a symbol that perhaps reflected official endorsement of Bacchanalian celebrations, together with the more traditionally accepted holiday decorations. Enlarging the photo did nothing to re-direct my imagination.

The President’s exploring the good news contained in the Employment Situation Report and trumpeting the trend in employment statistics may have been his muted version of a Bacchanalian victory lap, of sorts.

Focusing on that background item for as long as I did in wonderment caused me to lose sight of what should probably be recognized, as Friday’s Employment Situation Report indicated the addition of more than 300,000 new jobs in the past month, as well as a substantial upward revision to the previous month.

I guess that I wasn’t alone in losing focus about what’s been going on in the economy, as later that day during one of their now ubiquitous polls, CNBC viewers were asked whether President Obama was good for the stock market.

I suppose the answer may depend on the criteria one uses to define “good.” as well as whether one believes that things would have been better without him or his economic policies, or whether their time frame is forward or backward looking. read more