Weekend Update – March 6, 2016

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

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

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

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

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

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

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

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

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

Why they’re called the same thing confuses me.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
Traditional Stocks: Dow Chemical, MetLife, Pfizer

Momentum Stocks: Seagate Technology

Double-Dip Dividend: General Motors (3/9 $0.38)

Premiums Enhanced by Earnings: none

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