Nov122016

Weekend Update – November 13, 2016

Weekend Update Comment

Following the past week, it should be pretty easy to know what to do when the experts chime in and compete for your attention.

You run as far and as fast as your feet can possibly take you.

It will be fascinating to walk into a physician’s waiting room about 6 months from now and pick up some seven and eight month old copies of the news magazines sprinkled around the various end tables.

I’ve always enjoyed reading those aged articles just to get a snicker over how wrong the futurists and the experts consistently demonstrate themselves to be.

Most of the time, I don’t even have an appointment or any need. I just go to do the reading and then leave when someone finally asks “Sir, have you been helped?”

From the 99% probability of a Clinton victory in the Presidential election, as put forward by the Princeton Election Consortium, or the less sanguine 60-70% probability put forward by competitor fivethirtyeight, no one of any credibility got it right.

My guess is that if these elections predictions were written by stock analysts, the probability of a Clinton victory would have been reduced to 30% the day after the election, just as price targets and ratings are so often changed after stock moving news has already done its work.

By the same token, no one of any merit guessed that the market would rally after a Trump victory.

Following the sharp declines that were very highly correlated with news of a potential second shoe to drop with the Clinton emails and then the highly correlated surge when it was revealed that there was no second shoe, everyone became an expert waiting to chime in.

I know I was, but I don’t usually need any reason nor correlation.

Clinton was headed for an easy victory and the market would at least not follow a Trump victory path into correction.

Just when everything seemed to obvious, Clinton didn’t win and the market didn’t succumb.

Unless of course new closing highs are your definition of having succumbed.

For those playing around in the futures pit or in foreign exchanges and then prone to panic or with tight trading rules, the market did succumb long enough to prove someone’s point.

The reality is everyone got everything wrong.

Not only did Trump come out victorious, but the market was in full celebratory mode, even as interest rates rocketed higher and the only indicator that has had any value in 2016, the price of West Texas Intermediate crude oil, fizzled.

With the election out of the way, the only other story that may remain for the stock  market is whether the FOMC will finally raise interest rates in 2016.

For the most part, the free markets did the FOMC’s work for it as the 10 Year Treasury Note ended the week at 2.11%, having had an extraordinary 11% climb on a single day.

While it was all good this past week, unless of course you were a Clinton supporter, especially one leaving or short the market, I’m going to have a tough time predicting what comes next, even as retailers did their best to pit a positive spin on what awaits going into the holiday season and 2017.

That’s because of the really wide dichotomy seen this week as the S&P 500 managed its 3.8% gain, while the DJIA was 5.33% higher.

Either of those were enough to make most people happy and could just as easily be a stepping off point for even more highs or could represent a slippery slope.

Common sense may have told you that the split, if it was going to materialize, should have started as soon as sentiment began to change on Wednesday, as the DJIA made a nearly 1100 point reversal from the low point in the futures to its closing level.

It waited a full day, however, but once it did the relative performance, by sector, was fascinating, as it drew a clear distinction between the America that was perceived as existing under Clinton and the America that is now being perceived to exist under Trump.

Those perceptions are not much different from predictions of what will come to be and as we all know, predictions have a funny way of turning out.

I’m not going to run far and fast this coming week, but I am going to be wary, even as I’m thankful for so many people having been so wrong about where the markets were going to head.

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

After such increases as seen last week, it’s a little difficult to want to part with cash, unless you are of the belief that once a market high is broken, it’s only a short matter of time until the ascension continues.

I’m of the mind that some of the advances seen last week, particularly in those sectors that helped to create the dichotomy, are going to be short lived.

Once we all come to the realization that even had Hillary Clinton won the Presidential election, every President still has to put on their pant suit one leg at a time.

Casting the rhetoric aside, the harshest of the campaign and its promises are not as likely to become reality overnight, as rhetoric meats reality.

I’m not one to sell specific equities short, but if there ever felt like a right time to do so it could be in the coming week and weeks.

I’ll leave that decision to others that are far more bold than I am, however.

I think that last Friday’s trading, may otherwise be where we may find ourselves for the rest of the market, as we await some kind of a decision from the FOMC and then our own reaction to what now seems so certain.

Among the positions that I may be interested in this week is Best Buy (BBY).

It reports earnings this week and even as it closed 4% lower this past Friday, it is only 5% lower than its 52 week high. It’s downgrade a week before earnings may be a case of an analyst not waiting until the horse has left the gate and I do believe that there is some serious downside risk, if using charts as your measure.

That’s because of the significant gap higher just a few months ago that took shares about 22% higher after earnings were announced. That was far higher than the option market had been predicting.

This time, the option market is predicting an almost 10% price move, but Best Buy, over the past few years has shown that it could easily surprise those price predictions.

I’m not willing to get in front of earnings, but in the event that Best Buy disappoints on earnings and guidance and does take a marked move lower, I would be interested in either selling puts or considering a covered call position, once the upcoming ex-dividend date is announced.

In the event that I do sell puts, I would still be mindful of that ex-dividend date and would consider taking assignment, if in a position to do so, rather than attempting to keep the short put position open by rolling it over to a future date.

The dividend is worth capturing and would be even more so, in the event of a significant price decline.

You probably could have predicted with some degree of certainty that this would be another week of considering Marathon Oil (MRO).

This will, however, be another week that I won’t be following my own suggestion, because I already own my limit of 3 individual lots of shares or short puts.

Had I not done the unusual last week, I would be able to follow my own recommendation.

Last week, I decided to rollover a $14.50 short put position to keep it alive and to continue generating revenue, rather than allowing it to expire.

I did so because of the continuing risk-reward proposition, even as Marathon Oil’s price will decline by $0.05 on Monday, as it goes ex-dividend.

What prompted the decision was the realization that shares could fall an additional 3% before being faced with assignment, in exchange for an additional 1.3% ROI for the week.

For me, that has been the recurring proposition for much of 2016 and while Marathon Oil is sitting near the upper end of where I might want to establish any kind of a position, I would again embrace the chance to sell puts on the shares in the event of a decline, even if only 2-3%.

One thing that has been predictable this year has been Marathon Oil’s resilience within its trading range and the ease in which the position can be managed even in the event of a large adverse price movement.

While the shares have gone virtually nowhere in the past year, it has had enough movement in absolute terms to have made it a spectacular covered option choice and until a breakout to the upside, I suspect it will continue to be a reliable performer.

Finally, given the risky nature of the other selections this week, I actually struggled with whether to consider Microsoft (MSFT) this week.

As it sits within about 3% of its all time high, the shares are ex-dividend this week and the option premiums are fairly generous, perhaps expecting some benefit accruing from a Trump Presidency.

Some of that speculation revolves around proposed tax changes that could benefit Microsoft. Whether it’s a decrease in the corporate tax rate or a tax amnesty on profits held overseas, there may be some significant benefit to Microsoft in the event of changes to the tax code.

Where Microsoft differed from some others thought to be at future advantage, such as the pharmaceutical industry, it went lower, rather than helping to create that DJIA – S&P 500 dichotomy.

It’s somnolence last week is potentially appealing, even at its already high levels, as I will have a difficult time in the coming week trusting anything that I might believe or hear.

 

Traditional Stocks:  none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Microsoft (11/15 $0.39)

Premiums Enhanced by Earnings: Best Buy (11/17 AM)

 

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

 

 

 

 

 

 

 

Aug202016

Weekend Update – August 21, 2016

Weekend Update Comment

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

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

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

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

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

That is an expression of hope.

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

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

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

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

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

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

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

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

But, then there’s that nagging confusion.

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

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

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

That wasn’t the case this week.

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

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

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

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

At least I hope that’s the case.

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

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

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

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

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

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

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

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

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

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

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

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

Disappointing?

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

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

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

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

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

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

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

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

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

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

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

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

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

That is the essence of the caveat.

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

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

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

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

 

Traditional Stocks:   none

Momentum Stocks:  none

Double-Dip Dividend: none

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

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

Jul92016

Weekend Update – July 13, 2016

Weekend Update Comment

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

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

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

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

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

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

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

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

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

I need to be within range.

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

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

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

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

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

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

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

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

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

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

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

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

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

As a teaching tool, repetition can reinforce a lesson.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Finally, I really like Fastenal (FAST).

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks:  none

Momentum Stocks:  Best Buy, Marathon Oil, Seagate Technology

Double-Dip Dividend: none

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

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

 

May212016

Weekend Update – May 22, 2016

Weekend Update Comment

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

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

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

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

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

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

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

But only by the skin of its teeth.

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

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

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

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

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

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

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

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

I haven’t had many assignments in 2016, even as I’m pleased with the year to date. I’d be much more pleased, though, if I had more cash coming from more assignments of positions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That brings me to retail and more retail.

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

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

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

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

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

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

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

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

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

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

That’s not too much of a cushion.

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

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

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

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

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

Like GameStop there is a dividend in the near future.

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

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

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

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

Traditional Stocks:  Macy’s

Momentum Stocks: Under Armour

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

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

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

Apr92016

Weekend Update – April 10, 2016

Weekend Update Comment

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

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

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

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

Reminds me of something.

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

“The Sleeper” was deceiving.

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

Both, though, ended up going nowhere.

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

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

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

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

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

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

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

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

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

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

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

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

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

Earnings.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sometimes those ups and downs can be your best friend.

 

Traditional Stocks:  none

Momentum Stocks: Abercrombie and Fitch, Best Buy, Coach

Double-Dip Dividend: None

Premiums Enhanced by Earnings: None

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

Feb202016

Weekend Update – February 21, 2016

Weekend Update Comment

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

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

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

Sometimes you just have to swallow a bitter pill.

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

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

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

That is one big bitter pill.

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

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

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

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

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

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

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

Bad medicine, for sure to stock investors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks:  General Motors

Momentum Stocks: none

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

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

 

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

Feb142016

Weekend Update – February 14, 2016

Weekend Update Comment

It’s not only campaigns that are going negative.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s not a great selling point.

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

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

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

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

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

T-Mobile (TMUS) reports earnings this week.

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

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

The second comes from the option market.

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: General Electric, Sinclair Broadcasting, Weyerhauser

Momentum Stocks: Best Buy

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

Premiums Enhanced by Earnings: T-Mobile (2/17 AM)

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

Jan12016

Weekend Update – January 3, 3016

Weekend Update Comment

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

Dec52015

Weekend Update – December 6, 2015

Weekend Update Comment

 I don’t know if little kids still pick the petals off from daisies to the alternating refrain “She loves me, she loves me not.”

There was really no way to game that exercise, as there was with the other old refrain “Eenie meenie miney moe,” as you never knew whether there was an even or odd number of petals.

As much as one daisy looked like the next and as much as they shared the same pedigree, you really couldn’t stake much on what you saw.

Forget about trying to analyze the situation. If your romantic fortunes were tied to that daisy, that itself seemed to be a product of such intricate organization and detail, you could have arrived at your destination much more quickly by flipping a coin.

As much as you may have thought that the particular daisy you hadpicked out from among others in the field was talking directly to you, it was a mistake to believe that what you thought it was saying was really what was being said.

But most of us want to be optimistic and most of us want to believe in what we see on the surface.

Somewhat predictably, disappointment was as likely as elation as the last petal was about to hit the ground. That disappointment, though, was often preceded by a sense of hope as the petals were dwindling down to their final numbers. Everytime you heard “she loves me” and saw that you were getting closer to that very last petal, you felt a sense of confidence only to find that the odds of that confidence being rewarded were illusory.

On the other hand, it was easy to be on the winning side of “Eenie, meenie, miney, moe,” especially if the people you were with didn’t recognize the constancy of the refrain and didn’t understand the application of basic division or modular arithmetic. You also had to be adaptable and willing to subtly change your position, but the process was conquerable.

“Eenie meenie miney moe,” if played to your advantage, was a good example of a data driven action. You could stake it all on what you saw if you analyzed and then processed the changing information around you.

Most of all, you could believe the information.

For much of the past few months we’ve been lead to believe that action from the FOMC would be data driven. However, increasingly during that time, as data often seemed conflicting and not supportive of action, members of the Federal Reserve spoke in concrete terms that had to make reasonable people wonder whether data really was going to have a major role.

What we were hearing, particularly the shift toward more hawkish tones, wasn’t what we were seeing. If the data wasn’t there, why the change in tone? How do you prepare when those who are dispassionately analytical begin to sound less so?

What that has created over the past year has been an environment in which “Eenie meenies” have been replaced by daisies. What Federal Reserve Governors and FOMC members often said were at odds with what was observed and then subsequently with what they did.

Or in the case of interest rates, didn’t do.

The ability to reasonably assess and position oneself has been deteriorating as the disconnect between words and actions and words and intentions have become more commonplace.

Understandably, perhaps, this has also been a year in which the market has gone back and forth in paroxysms of buying and selling.

Those paroxysms have simply been efforts to get better positioning as the two faces of those charged with making the decision that we’ve been awaiting ever since Janet Yellen assumed the reigns of the Federal Reserve, have continually confounded everyone. 

Meanwhile, while traders may have believed that an “Eenie meenie” strategy was indicated, it really has been a case of a coin flip as may have been best demonstrated by this past week. Positioning yourself is worthless when the currency is a petal.

With lots of gyrations and lots of interesting comments this past week from Janet Yellen, numerous Federal Reserve Governors and Mario Draghi, of the ECB, the messages alternated between creating big disappointment and enormous hope.

With all of that, the market was virtually unchanged for the week, as has been the tale for all of 2015.

Friday’s strong Employment Situation Report may have finally put an end to the disconnect between words and actions. The market seemed to have embraced what it viewed as the last petal that could now lead to a period of more fundamental analysis ahead, rather than guessing what the FOMC will or won’t do. 

Hopefully, when the FOMC meets in about 10 days, words and actions will finally be aligned and two faces will become one.

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

It’s always difficult to look at a coming week with an eye on trying to identify bargains for a potential short term trade when the market closed the previous week with a large gain.

Friday’s nearly 400 DJIA point gain and that seen in the S&P 500 bringing that index within about 2% of its all time high, makes you wonder just what was wrong with those companies that lagged behind.

WIth the FOMC meeting still a week away there may still be some opportunity this coming week, as the buying on the rumor kind of activity seen this past Friday could still have some time to run, as the news is still a bit away.

Of course, I’m not certain if I would want to be around if the expected news doesn’t materialize, but it seems almost impossible to imagine that being the case. By the same token, I’m not certain that I want to be around when the expected news does materialize if that leads to the typical “sell on the news” kind of activity.

With that in mind, I don’t expect to be very active this week, as I will be reluctant to add positions after Friday’s surge that could then be at risk for a typical profit taking binge when expectations for an interest rate hike become realized.

Best Buy (BBY) was one of those companies that lagged on Friday and is well below its recent highs, which of course finds it in the company of so many others, despite the market being within easy striking distance of creating more new highs.

I thought about adding shares of Best Buy last week, but as it is ex-dividend this week, the rationale for finally relinquishing some cash in return for its option premium and dividend feels stronger as the potential return is very appealing, even if shares just tread water this week.

Historically, Best Buy has lagged during the final month of the year, even as other retailers have fared well. I don’t have much interest in adding to my existing Best Buy position with a longer term holding in mind, but I think a short term venture could be justified.

Macy’s (M) is another that lagged last week and had a 5 day performance similar to that of Best Buy. More importantly, it still hasn’t recovered from its earnings plunge last month and is an astonishing 46% lower in the past 5 months.

I purchased shares shortly after the earnings decline and am ready to add some more this week as those shares will also be ex-dividend. While my existing shares have calls written against them with a December 24th expiration, any additional shares purchased will most likely use a weekly expiration and may also be more likely to look at an out of the money strike, rather than the typical “Double Dip Dividend” approach that I prefer to use, in anticipation of some short term price appreciation.

Additionally, since the ex-dividend date is on a Friday, if the shares are likely to be assigned because their closing price on Thursday exceeds the strike price plus the amount of the dividend, I would consider rolling those shares over to the following week or beyond, in an effort to wring some additional premium out of the position in the event that there will then be an early assignment of the newly sold call options.

I was thinking about re-purchasing shares of Pfizer (PFE) last week in the hopes of an early week decline.

That decline came mid-week instead and I wasn’t very interested in adding any additional new positions for the week. Ultimately, Pfizer did as the market did for the week and ended unchanged.

My thinking hasn’t changed, though.

I would very strongly consider a re-purchase of recently assigned Pfizer shares on any weakness, particularly at the beginning of the week, as its premiums are still enhanced over the uncertainty surrounding the proposed tax inversion motivated merger with Ireland’s Allergan (AGN).

That process may be one that takes a while to play out and I don’t believe that there’s very much downside for Pfizer in the event that the deal can’t get done due to government rulings.

I wouldn’t mind collecting those premiums on a serial basis and would even consider rolling over positions that might otherwise be assigned if I was satisfied with my cash reserve position.

I’m not a huge fan of T-Mobile’s (TMUS) CEO, but you do have to admire someone who advocates for his company, even as he may be presiding over a company that he desperately wants to become part of a larger family, preferably one with very deep pockets or the right kind of assets.

Thanks to not paying a dividend, T-Mobile has been able to aggressively fund its activities to lure customers from others, while still leavingsufficent net earnings per share that are the envy of its competitors.

When your competitors have deeper pockets, though, that makes it hard to compete for very long, so I do wonder what additional surprises John Legere may have planned before those earnings begin to feel some pressure.

Shares have fallen about 17% in the past 10 weeks. While T-Mobile actually out-performed the market this past Friday, it did trail for the full week.

I’d be very interested in considering the sale of put options on shares if it gives up a meaningful portion of last Friday’s gain and actually wouldn’t mind the prospects of having to actively maintain that position by having to roll it over in sequential weeks in an effort to avoid assignment, while collecting premiums that are reflective of the risk.

Occasionally that can be a rewarding approach, although you sometimes have to be prepared for a longer term adverse price move.

Finally, that has exactly been the case with my favorite put sale of 2014, Twitter (TWTR), which has instead become a pariah in 2015.

With the experience of 2015 still needing to bring itself to a conclusion, I think that I am finally ready to add to the existing short put position.

At least with Twitter, the product, there isn’t enough space to speak out of both sides of your mouth, but there may be some hope that the companies executives, with a little more shell shocked experience under their belts may be better prepared to deal with investor expectations and won’t do so much to unnecessarily challenge those expectations as it gets prepared for earnings in January.

With those earnings being reported on January 26t, 2016, but the last extended weekly option expiration date on January 22, 2016, I would take an uncharacteristic position by going longer term and drawing a line in the sand at selling the $24 put. That premium is very attractive as many believe that the next stop for Twitter is $20.

With earnings the week after expiration of that contract, if selling that contract, you do have to be prepared to rollover before earnings and attempting to then take advantage of the earnings enhanced premiums in the hope that the brakes are finally applied and more carefully chosen words and messages are delivered during the ensuing conference call.

Hopefully, CEO Jack Dorsey will speak clearly and paint a vision that is more confident, but based on some kind of reality that we can all believe.



Traditional Stocks:  Pfizer

Momentum Stocks: T-Mobile, Twitter

Double-Dip Dividend:  Best Buy (12/8 $0.23), Macy’s (12/11 $0.36)

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.

Nov272015

Weekend Update – November 29, 2015

Weekend Update Comment

We used to believe that the reason people so consistently commented about how tired they were after a big Thanksgiving meal was related to the turkey itself.

Within that turkey it was said that an abundance of the basic amino acid,”tryptophan,” which is a precursor of “serotonin”  played a role in its unique ability to induce sleep.

More reasoned people believe that there is nothing special about turkey itself, in that it has no more tryptophan than any other meat and that simply eating without abandon may really explain the drowsiness so commonly experienced. Others also realize that tryptophan, when part of a melange of other amino acids, really doesn’t stand out of the crowd and exert its presence.

Then there’s the issue of serotonin itself, a naturally produced neurotransmitter, which is still not fully understood and can both energize and exhaust, in what is sometimes referred to as “the paradox of serotonin.”

From what is known about serotonin, if dietary tryptophan could exert some pharmacological influence by simply eating turkey, we would actually expect to find reports of people who got wired from their Thanksgiving meals instead of sedated.

Based upon my Thanksgiving guests this year, many of whom found the energy to go out shopping on Thursday and Friday nights, they were better proof of the notion that Black Fridays matter, rather than of the somnolent properties of turkey.

In the case of the relationship between the tryptophan in turkey and ensuing sleep, it may just be a question of taking disparate bits of information, each of which may have some validity and then stringing them together in the belief that their individual validity can be additive in nature.

Truth doesn’t always follow logic.

Another semi-myth is that when traders are off dozing or lounging in their recliners instead of trading, the likelihood of large market moves is enhanced in a volume depleted environment.

You definitely wouldn’t have known it by the market’s performance during this past week, as Friday’s trading session began the day with the S&P 500 exactly unchanged for the week and didn’t succeed in moving the needle as the week came to its end.

Other than the dueling stories of NATO ally Turkey and stuffing ally turkey, there wasn’t much this week to keep traders awake. The former could have sent the market reeling, but anticipation of the latter may have created a calming influence.

You couldn’t be blamed for buying into the tryptophan myth and wondering if everyone had started their turkey celebration days before the calendar warranted doing so.

Or maybe traders are just getting tired of the aimless back and forth that has us virtually unchanged on the DJIA for 2015 and up only 1.5% on the S&P 500 for the year.

Tryptophan or no tryptophan, treading water for a year can also tire you out.

The week started off with the news of China doubling its margin requirements and an agreement on a $160 Billion tax inversion motivated merger, yet the reaction to those news items was muted.

The same held for Friday’s 5.5% loss in Shanghai that barely raised an eyebrow once trading got underway in the United States, as drowsiness may have given way to hibernation.

Even the revised GDP, which indicated a stronger than expected growth rate, failed to really inflate or deflate. There was, however, a short lived initial reaction which was a repudiation of the recent seeming acceptance of an impending interest rate hike. For about an hour markets actually moved outside of their very tight range for the week until coming to its senses about the meaning of economic growth.

Next week there could be an awakening as the Employment Situation Report is released just days before the FOMC begins their December meeting which culminates with a Janet Yellen press conference.

Other than the blip in October’s Employment Situation Report, the predominance of data since seems to support the notion of an improving economy and perhaps one that the FOMC believes warrants the first interest rate hike in almost 10 years.

With traders again appearing to be ready to accept such an increase it’s not too likely that a strong showing will scare anyone away and may instead be cause for a renewed round of optimism.

On the other hand, a disappointing number could send most into a tizzy, as uncertainty is rarely the friend of traders and any action by the FOMC in the face of non-corroborating data wouldn’t do much to inspire confidence in anything or any institution.

For my part, I wouldn’t mind giving the tryptophan the benefit of the doubt and diving deeply into those turkey leftovers with express instructions to be woken up only once 2016 finally arrives.

Knowing that flat years, such as this one has been to date, are generally followed by reasonably robust years, overloading on the tryptophan now may be a good strategy to avoid more market indecision and avoid the wasteful use of energy that could be so much better spent in 2016.

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

A number of potential selections this week fall into the “repeat” category.

Unlike a bad case of post-Thanksgiving indigestion, the kind of repeating that occasionally takes place when selling covered calls, is actually an enjoyable condition and is more likely to result in a look of happiness instead of one of gastric distress.

This week I’m again thinking of buying Bank of America (BAC), Best Buy (BBY), Morgan Stanley (MS) and Pfizer (PFE), all of which I’ve recently owned and lost to assignment.

Sometimes that has been the case on multiple occasions over the course of just a few weeks. Where the real happiness creeps in is when you can buy those shares back and do so at a lower price than at which they were assigned.

With the S&P 500 only about 2% below its all time high, I would welcome some weakness to start the week in hopes of being able to pick up any of those 4 stocks at lower prices. My anticipation is that Friday’s Employment Situation Report will set off some buying to end the week, so I’d especially like to get the opportunity to make trades early in the week.

Bank of America and Morgan Stanley, of course, stand to benefit from increasing interest rates, although I suppose that some can make the case that when the news of an interest rate increase finally arrives, it will signal a time to sell.

If you believe in the axiom of “buying on the rumor and selling on the news,” it’s hard to argue with that notion, but I believe that the financials have so well tracked interest rates, that they will continue doing so even as the rumor becomes stale news.

As an added bonus, Bank of America is ex-dividend this week, although it’s dividend is modest by any standard and isn’t the sort that I would chase after.

Both, however, may have some short upside potential and have option premiums that are somewhat higher than they have been through much of 2015.

While both are attractive possibilities in the coming week or weeks, if forced to consider only one of the two, I would forgo Bank of America’s added bonus and focus on Morgan Stanley, as it has recovered from its recent earnings related drop, but now may be getting ready to confront its even larger August decline.

Bank of America, on the other hand, is not too far from its 2015 high point, but still can be a good short term play, perhaps even being a recurrent one over the next few weeks.

Also ex-dividend this week are two retailers, Wal-Mart (WMT) and Coach (COH) and together with Best Buy (BBY) and Bed Bath and Beyond (BBBY) are my retail focus, as I expect this year to be like most others, as the holiday season begins and ends.

While Coach may have lost some of its cachet, it’s still no Wal-Mart in that regard.

Coach has struggled to return to its April 2015 levels, although it may finally be stabilizing and recent earnings have suggested that its uncharacteristically poor execution on strategy may be coming to an end.

With a very attractive dividend and an option premium that continues to reflect some uncertainty, I wouldn’t mind finding some company for a much more expensive lot of shares that I’ve been holding for quite some time. With the ex-dividend date this week, the stars may be aligned to do so now.

I bought some Wal-Mart shares a few weeks ago after a disastrous day in which it sustained its largest daily loss ever, following the shocking revelation that increasing employee wages was going to cost the company some money.

The only real surprise on that day was that apparently no one bothered doing the very simple math when Wal-Mart first announced that it was raising wages for US employees. They provided a fixed amount for that raise and the number of employees eligible for that increase was widely known, but basic mathematical operations were out of reach to analysts, leading to their subsequent shock some months later.

Wal-Mart shares will be getting ready to begin the week slightly higher than where I purchased my most recent shares. I don’t very often add additional lots at higher prices, but the continuing gap between the current price and where it had unexpectedly plunged from offers some continued opportunity.

As with Coach, in advance of an ex-dividend date may be a fortuitous time to open a position, particularly as the option premium and dividend are both attractive, as are the shares themselves.

Neither Best Buy nor Bed Bath and Beyond are ex-dividend this week, although Best Buy will be so the following week.

That may give reason to consider selling an extended option if purchasing Best Buy shares, but it could also give some reason to sell weekly options, but to consider rolling those over if assignment is likely.

In doing so, one strategy might be to select a rollover date perhaps two weeks away and still in the money. In that manner, there may still be reason for the holder of the option contract to exercise early in order to capture the dividend, but as the seller you would receive a relatively larger premium that could offset the loss of the dividend while at the same time freeing up the cash tied up in shares of Best Buy in order to be able to put it to use in some other income producing position.

Bed Bath and Beyond is a company that I frequently consider buying and would probably have done much more frequently, if only it had offered a dividend or consistently offered weekly options for sale and purchase.

It still doesn’t offer a dividend, but sitting near a 2 year low and never being in one of their stores without lots of company at the cash register, the shares really have their appeal during the holiday season.

Finally, even with an emphasis on financials and retail, Pfizer (PFE) continues to warrant a look.

Having purchased shares last week and having seen them assigned, there’s not too much reason to believe that their planned merger with Ireland based Allergan (AGN), is going to be resolved any time soon.

While we wait for that process to play itself out, there may be fits and starts. There will clearly be opposition to the merger, as attention will focus on many issues, but none as controversial as the tax avoidance that may be a primary motivator for the transaction.

If the news for Pfizer eventually turns out to be negative and an immovable roadblock is placed, I don’t think that very much of Pfizer’s current price reflects the deal going to its anticipated completion.

With that in mind, the upside potential may be greater than the downside potential. As long as the option premiums are reflected any increased risk, this can be an especially lucrative trade the longer the process gets stretched out, particularly if Pfizer trades in a defined range and the position can be serially rolled over or purchased anew.

Traditional Stocks:  Bed Bath and Beyond, Morgan Stanley, Pfizer

Momentum Stocks:  Best Buy

Double-Dip Dividend: Bank of America (12/2 $0.05), Coach (12/2 $0.34), Wal-Mart (12/2 $0.49)

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.

Sep52015

Weekend Update – September 6, 2015

Week in Review Comment

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.

Jul182015

Weekend Update – July 19, 2015

Weekend Update Comment

There’s a lot of confusion over who was responsible for the idea that time is merely an illusion and that it is “nature’s way of preventing everything from happening all at once.”

The first part of the idea is certainly thought provoking and is beyond my ability to understand. The second part may be some attempt at a higher plane of humor in an attempt to explain the significance of what is beyond the capability of most people.

In essence, if you thought that the time frame described during the first seven days of creation was compressed, some physicists would suggest that it all actually happened all at once and if you had the appropriate vehicle traveling at sufficient speed you would know that first hand.

The humorous quip has been attributed to Albert Einstein, Woody Allen and others. It has also been attributed to theoretical physicist John Archibald Wheeler, who was one of Einstein’s last collaborators, which itself indicates a relative time in Einstein’s career, so it may be unlikely that Wheeler would have described himself in those terms, if he was a real believer.

You might believe that Wheeler’s single degree of separation from Einstein would suggest hat perhaps the true source of the concept would then be Einstein himself. However, Wheeler maintained that he actually saw it scrawled on a men’s room wall in an Austin, Texas cafe, that in theory would have occurred at the same time that Einstein saw the famous Theory of Relativity equation scrawled on the men’s room wall of a Dusseldorf beer garden.

The idea, though, flows from Einstein’s earlier works on time, space and travel and may have been an inspiration to some well read patron while making room for the next idea inducing purchase of a large quantity of beer, wine or spirits.

This past week may have been an example of time forgetting its role, as we saw an avalanche of important news and events that came upon us in quick succession to begin the week. The news of an apparent agreement to the resolution of the Greek debt crisis and the announcement of a deal on Iran’s march toward developing a nuclear weapon came in tandem with the non-event of a melt down of the Chinese stock market.

The majority of the 2.4% weekly gain seen in the S&P 500 was over by the time we could blink, as the rest of the week offered little of anything, but saw a continuing successful test of support in the S&P 500, nearly 5% lower, as it moved to be in a position to now test resistance.

With the near simultaneous occurrence of those important events, the real question may be whether or not they themselves are illusory or at least short-lived.

Time may be the key to tell whether the events of this week were justifiable in creating a market embrace of a rosy future.

We’ve lived through past Greek debt crises before, so there is probably little reason to suspect that this will be the last of them for Greece or even the last we’ll see in the Eurozone. When and where the next flash point occurs is anyone’s guess, but German Finance Minister Wolfgang Schäuble’s comments regarding Greece’s place in the EU continues to leave some uncertainty over the sanctity of that union and their currency.

With an Iranian deal now comes the effort to block it, which itself has a 60 day time limit for Congressional opponents to do their best to defeat the proposal and then overcome a Presidential veto. While it’s not too likely that the latter will become reality, there will be no shortage of attempts to undermine the agreement that probably contributed to continuing weakness in the energy sector in fears that Iranian oil would begin flooding markets sooner than is plausible.

The Chinese attempts at manipulating their stock markets have actually worked far longer than I would have predicted. Here too, time is in play, as there is a 6 month moratorium on the sale of some stocks and by some key individuals. That’s a long time to try and hold off real market dynamics and those forces could very well yet undermine the Chinese government’s “patriotic fight” to save its stock market.

The role that those three may have played in moving the market higher last week may now become potential liabilities until they have stood the test of time.

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

The coming week is very short on scheduled economic news, but will be a very busy one as we focus on fundamentals and earnings.

While there are lots of earnings reports coming this week the incredibly low volatility, after flirting with higher levels just 2 weeks ago, has resulted in few opportunities to try and exploit those earnings reports.

As again approaching all time highs and being very reluctant to chase new positions, I would normally focus on relatively safe choices, perhaps offering a dividend to accompany a premium from having sold call options.

This week, the only new position that may fulfill those requirements is Fastenal (NASDAQ:FAST) which offers only monthly options and reported earnings last week.

It has been mired in a narrow price range since its January 2015 earnings report and is currently trading at the low end of that range. Having just reported earnings in line with estimates is actually quite an achievement when considering that Fastenal has been on a hiring spree in 2015 and has significantly added costs, while revenues have held steady, being only minimally impacted by currency exchange rates.

Their business is a very good reflector of the state of the economy and encompasses both professional construction and weekend warrior customers. They clearly believe that their fortunes are poised to follow an upswing in economic activity and have prepared for its arrival in a tangible way.

At the current price, I think this may be a good time to add shares, capture a dividend and an option premium. I may even consider going out a bit further in time, perhaps to the November 2014 option that will take in the next earnings report and an additional dividend payment, while seeking to use a strike price that might also provide some capital gains on shares, such as the $45 strike.

DuPont (NYSE:DD) isn’t offering a dividend this week, although it will do so later in the August 2015 option cycle. However, before getting to that point, earnings are scheduled to be announced on July 28th.

Following what many shareholders may derisively refer to as the “successful” effort to defeat Nelson Peltz’s bid for a board seat, shares have plummeted. The lesson is that sometimes victories can be pyrrhic in nature.

Since that shareholder vote, which was quite close by most proxy fight standards, shares have fallen about 15%, after correcting for a spin-off, as compared to a virtually unchanged S&P 500.

However, if not a shareholder at the time, the current price may just be too great to pass up, particularly as Peltz has recently indicated that he has no intention of selling his position. While DuPont does offer weekly and expanded weekly option contracts, I may consider the sale of the August monthly contract in an attempt to capture the dividend and perhaps some capital gains on the shares, in addition to the premium that will be a little enhanced by the risk associated with earnings.

The remainder of this week’s limited selection is a bit more speculative and hopefully offers quick opportunities to capitalize by seeing assignment of weekly call options or expiration of weekly puts sold and the ability to recycle that cash into new positions for the following week.

eBay (NASDAQ:EBAY), of course, will be in everyone’s sights as it begins trading without PayPal (Pending:PYPL) as an integral part. Much has been made of the fact that the market capitalization of the now independent PayPal will be greater than that of eBay and that the former is where the growth potential will exist.

The argument of following growth in the event of a spin-off is the commonly made one, but isn’t necessarily one that is ordained to be the correct path.

I’ve been looking forward to owning shares of eBay, as it was a very regular holding when it was an absolutely mediocre performer that happened to offer very good option premiums while it tended to trade in a narrow and predictable range.

What I won’t do is to rush in and purchase shares in the newly trimmed down company as there may be some selling pressure from those who added shares just to get the PayPal spin-off. For them, Monday and Tuesday may be the time to extricate themselves from eBay, the parent, as they either embrace PayPal the one time child, if they haven’t already sold their “when issued” shares.

However, on any weakness, I would be happy to see the prospects of an eBay again trading as a mediocre performer if it can continue to have an attractive premium. Historically, that premium had been attractive even long before murmurings or demands for a PayPal spin-off became part of the daily discussion.

Following a downgrade of Best Buy (NYSE:BBY), which is no stranger to falling in and out of favor with analysts, the opportunity looks timely to consider either the sale of slightly in the money puts or the purchase of shares and sale of slightly out of the money calls.

The $2 decline on Friday allowed Best Buy shares to test a support level and is now trading near a 9 month low. With earnings still a month away, shares offer reasonable premiums for the interim risk and sufficient liquidity of options if rollovers may be required, particularly in the event of put sales.

The arguments for and against Best Buy’s business model have waxed and waned over the past 2 years and will likely continue for a while longer. As it does so, it offers attractive premiums as the 2 sides of the argument take turns in being correct.

Seagate Technology (NASDAQ:STX) will report earnings on July 31st. In the meantime, that gives some opportunity to consider the sale of out of the money puts.

While I generally prefer not to be in a position to take assignment in the event of an adverse price reaction and would attempt to rollover the puts, in this case with an upcoming ex-dividend date likely to be the week after earnings are released, I might consider taking the assignment if faced with that possibility and then subsequently selling calls, perhaps for the week after the ex-dividend date in an effort to capture that dividend and also attempt to wait out any price recovery.

Like Best Buy, Seagate Technology has been in and out of favor as its legitimacy as a continuing viable company is periodically questioned. Analysts pretend to understand where technology and consumer preferences are headed, but as is the case with most who are in the “futurist” business, hindsight often offers a very punishing report card.

Finally, GoPro (NASDAQ:GPRO) reports earnings this week. During its brief time as a publicly traded company it has seen plenty of ups and downs and some controversy regarding its lock-up provisions for insiders.

It is also a company whose main product may be peaking in sales and it has long made a case for seeking to re-invent itself as a media company, in an effort to diversify itself from dependence on consumer cycles or from its product going the commodity route.

The option market is implying a 9.9% movement in shares next week as earnings are reported. However, a 1% ROI may possibly be achieved if selling a weekly put at a strike that is 13.3% below this past Friday’s closing price.

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

Traditional Stocks: DuPont, eBay

Momentum Stocks: Best Buy, Seagate Technology

Double-Dip Dividend: Fastenal (7/29)

Premiums Enhanced by Earnings: GoPro (7/21 PM)

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

May162015

Weekend Update – May 17, 2015

Weekend Update Comment

The nice thing about the stock and bond markets is that anything that happens can be rationalized.

That’s probably a good thing if your job includes the need to make plausible excuses, but unless you work in the finance industry or are an elected official, the chances are that particular set of skills isn’t in high demand.

However, when you hear a master in the art of spin ply his craft, it’s really a thing of beauty and you wonder why neither you nor anyone else seemed to see things so clearly in a prospective manner.

Sometimes rationalization is also referred to as self-deception. It is a defense mechanism and occasionally it becomes part of a personality disorder. Psychoanalysts are divided between a positive view of rationalization as a stepping-stone on the way to maturity and a more destructive view of it as divorcing feeling from thought and undermining powers of reason.

In other words, sometimes rationalization itself is good news and sometimes it’s bad news.

But when it comes to stock and bond markets any interpretation of events is acceptable as long as great efforts are taken to not overtly make anyone look like an idiot for either having made a decision to act or having made a decision to be passive.

That doesn’t preclude those on the receiving end of market rationalizations to wonder how they could have been so stupid as to have missed such an obvious connection and telegraphed market reaction.

That’s strange, because when coming to real life personal and professional events, being on the receiving end of rationalization can be fairly annoying. However, for some reason in the investing world it is entirely welcomed and embraced.

In hindsight, anything and everything that we’ve observed can be explained, although ironically, rationalization sometimes removes rational thought from the process.

The real challenge, or so it seems, in the market, is knowing when to believe that good news is good and when it is bad, just like you need to know what the real meaning of bad news is going to be.

Of course different constituencies may also interpret the very same bits of data very differently, as was the case this past week as bond and stock markets collided, as they so often do in competition for investor’s confidence.

We often find ourselves in a position when we wonder just how news will be received. Will it be received on its face value or will markets respond paradoxically?

This week any wonder came to an end as it became clear that we were back to a world of rationalizing bad news as actually being something good for us.

In this case it was all about how markets viewed the flow of earnings reports coming from national retailers and official government Retail Sales statistics.

In a nutshell, the news wasn’t good, but that was good for markets. At least it was good for stock markets. Bond markets are another story and that’s where there may be lots of need for some quick rationalizations, but perhaps not of the healthy variety.

In the case of stock markets the rationalization was that disappointing retail sales and diminished guidance painted a picture of decreased inflationary pressures. In turn, that would make it more difficult for an avowed data driven Federal Reserve to increase interest rates in response. So bad news was interpreted as good news.

If you owned stocks that’s a rationalization that seems perfectly healthy, at least until that point that the same process no longer seems to be applicable.

As the S&P 500 closed at another all time high to end the week this might be a good time to prepare thoughts about whether what happens next is because we hit resistance or whether it was because of technical support levels.

^TNX Chart

On the other hand, if you were among those thought to be a member of the smartest trading class, the bond traders, you do have to find a way to explain how in the face of no evidence you sent rates sharply higher twice over the past 2 weeks. Yet then presided over rates ending up exactly where they started after the ride came to its end.

The nice thing about that, though, is that the bond traders could just dust off the same rationalization they used for surging rates in mid-March 2015.

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

Cisco (NASDAQ:CSCO) has had a big two past weeks, not necessarily reflected in its share price, but in the news it delivered. The impending departure of John Chambers as CEO and the announcement of his successor, along with reporting earnings did nothing to move the stock despite better than expected revenues and profits. In fact, unlike so many others that reported adverse currency impacts, Cisco, which does approximately 40% of its revenues overseas was a comparative shining star in reporting its results.

However, unlike so many others that essentially received a free pass on currency issues, because it was expected and who further received a free pass on providing lowered guidance, Cisco’s lowered guidance was thought to muzzle shares.

However, as the expected Euro – USD parity is somehow failing to materialize, Cisco may be in a good position to over-deliver on its lowered expectations. In return for making that commitment to its shares with the chance of a longer term price move higher, Cisco offers a reasonable option premium and an attractive dividend.

Both reporting earnings this week, Best Buy (NYSE:BBY) and Hewlett Packard (NYSE:HPQ), have fortunes that are, to a small degree, related to one another.

In two weeks I will try to position myself next to the husband of the Hewlett Packard CEO at an alumni reunion group photo. By then it will be too late to get any earnings insights, not that it would be on my agenda, since I’m much more interested in the photo.

No one really knows how the market will finally react to the upcoming split of the company, which coincidentally will also be occurring this year at the previous employer of the Hewlett Packard CEO, Meg Whitman.

The options market isn’t anticipating a modest reaction to Hewlett Packard’s earnings, with an implied move of 5.2%. However, the option premiums for put sales outside the lower boundary of that range aren’t very appealing from a risk – reward perspective.

However, if the lower end of that boundary is breached after earnings are released and approach the 52 week lows, I would consider either buying shares or selling puts. If selling puts, however and faced with the prospects of rolling them over, I would be mindful of an upcoming ex-dividend event and would likely want to take ownership of shares in advance of that date.

I currently own shares of Best Buy and was hopeful that they would have been assigned last week so as to avoid them being faced with the potential challenge of earnings. Instead, I rolled those shares over to the June 2015 expiration, possibly putting it in line for a dividend and allowing some recovery time in the event of an earnings related price decline.

However, with an implied move of 6.6% and a history of some very large earnings moves in the past, the option premiums at and beyond the lower boundary of the range are somewhat more appealing than is the case with Hewlett Packard.

As with Hewlett Packard, however, I would consider waiting until after earnings and then consider the sale of puts in the event of a downward move. Additionally, because of an upcoming ex-dividend date in June, I would consider taking ownership of shares if puts are at risk of being exercised.

It’s pretty easy to rationalize why MetLife (NYSE:MET) is such an attractive stock based on where interest rates are expected to be going.

The only issue, as we’ve seen on more than one recent occasion is that there may be some disagreement over the timing of those interest rate hikes. Since MetLife responds to those interest rate movements, as you might expect from a company that may be added to the list of “systemically important financial institutions,” there can be some downside if bonds begin trading more in line with prevailing economic softness.

In the interim, while awaiting the inevitable, MetLife does offer a reasonable option premium, particularly as it has traded range-bound for the past 3 months.

A number of years ago the controlling family of Cablevision (NYSE:CVC) thought it had a perfectly rationalized explanation for why public shareholders would embrace the idea of taking the company private.

The shareholding public didn’t agree, but Cablevision hasn’t sulked or let the world pass it by as the world of cable providers is in constant flux. Although a relatively small company it seems to get embroiled in its share of controversy, always keeping the company name in the headlines.

With a shareholder meeting later this month and shares going ex-dividend this week, the monthly option, which is all that is offered, is very attractive, particularly since there is little of controversy expected at the upcoming shareholder meeting.

Also going ex-dividend this week, and also with strong historical family ties, is Johnson and Johnson (NYSE:JNJ). What appeals to me about shares right now, in addition to the dividend, is that while they have been trailing the S&P 500 and the Health Care SPDR ETF (NYSEARCA:XLV) since early 2009, those very same shares tend to fare very well by comparison during periods of overall market weakness.

In the process of waiting for that weakness the dividend and option premium can make the wait more tolerable and even close the performance gap if the market decides that 2022 on the S&P 500 is only a way station toward something higher.

Finally, there are probably lots of ways one can rationalize the share price of salesforce.com (NYSE:CRM). Profits, though, may not be high on that list.

salesforce.com has certainly been the focus of lots of speculation lately regarding a sale of the company. However, of the two suitors, I find it inconceivable that one of them would invite the CEO, Marc Benioff back into a company that already has a power sharing situation at the CEO level and still has Larry Ellison serving as Chairman.

I share price was significantly buoyed by the start of those rumors a few weeks ago and provide a high enough level that any disappointment from earnings, even on the order of those seen with Linkedin (NYSE:LNKD), Yelp (NYSE:YELP) and others would return shares to levels last seen just prior to the previous earnings report.

The options market is implying a 7.3% earnings related move next week. After a recent 8% climb as rumors were swirling, there is plenty of room for some or even all of that to be given back, so as with both Best Buy and Hewlett Packard, I wouldn’t be overly aggressive in this trade prior to earnings, but would be very interested in joining in if sellers take charge on an earnings disappointment. However, since there is no dividend in the picture, if having sold puts and subject to possible exercise, I would likely attempt to rollover the puts rather than take assignment.

But either way, I can rationalize the outcome.

Traditional Stocks: Cisco, MetLife

Momentum Stocks: none

Double Dip Dividend: Cablevision (5/20), Johnson and Johnson (5/21)

Premiums Enhanced by Earnings: Best Buy (5/21 AM), Hewlett Packard (5/21 PM), salesforce.com (5/20 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.

Apr172015

Weekend Update – April 19, 2015

Weekend Update Comment

When I was a kid just about the funniest word any of us had ever heard was “fink.” Way back then that was pretty much the way Mad Magazine felt too, as it used that word with great regularity.

I was stunned the very first time I actually met someone whose last name was “Fink,” but that came only after some giggles. I think the only thing funnier was when I met Morris Lipschitz.

Sadly, I thought that was funny even though it was after college, as it reminded me of the prank phone calls we used to make as kids.

I think “fink” has since fallen out of common parlance. Back then hearing the word “Fink” word evoked the same reactions as today’s kids may experience when hearing a sentence such as “but I do do what you tell me to do.”

I don’t think that’s very funny after the first 20 or so times, but I’ve gained a certain level of maturity over the years.

I don’t know very much with any degree of certainty, but I do know that I’m never likely to meet Larry Fink, the CEO and Chairman of BlackRock (NYSE:BLK).

With more than $4 trillion under management people at least give the courtesy of listening when Larry Fink speaks, even if they may not agree with the message or the opinion. The only giggles that he may get are when people may feel the need to laugh when they’re not certain if he’s joking.

This week, he wasn’t joking, although there were certainly some, at whom his message was directed, that won’t take it seriously or to heart.

I never really thought about Larry Fink very much until this week whenhe said something that needed to be said.

While investors seem to love buybacks and dividend hikes Fink politely said that CEOs were being “too nice to shareholders.”

The most conventional interpretation is that buybacks and dividends may be coming at the expense of future growth, research and investment in the business. It also calls into question whether you really need a CEO and a board to do any long range strategic planning if companies are going to become something on the order of a REIT and just return earnings to shareholders in one form or another while effectively mortgaging the future.

Of course, that also calls into question the role or responsibility of activists, who now take great pains to distinguish themselves from what used to be called corporate raiders back in the days when I thought the very mention of Lipschitz was hilarious.

They may be more genteel in their ways and they may stick around longer, but so do buzzards as long as there’s still something left on the carcass.

What Fink didn’t directly say was that CEOs and their Board of Directors were being far too nice to themselves at the expense of the future health of their company. Their paydays, both direct and indirect, benefit far more from short term strategies than do shareholders, especially those who are truly investors and not traders.

Jack Welch, former Chairman and CEO of General Electric (NYSE:GE) which has certainly been in the news lately for its own buybacks, may, in hindsight begin to seem like an Emperor without much of a wardrobe. The haze from hot air may have obscured the view, but to his never ending credit, Welch has long criticized incompetent board directors and the roles they may play in the diminution of once great American companies.

Sooner or later the cash needed for buybacks is going to start to dry up, especially when the predominant buying of shares may be at price far removed from bargain share prices.

What then?

It’s difficult to argue that fundamentals have been altered through intervention in the form of buybacks, but that fuel may have peaked with the recent General Electric announcement. It’s hard to imagine, but we may soon get to that point that quarter to quarter comparisons will actually have to depend on real earnings and not simply benefiting from having fewer and fewer shares in the float from one quarter to the next.

The prevailing question, at least in my mind, is where will the next real catalyst come from to drive markets higher. As currency exchange issues have been making themselves tangible as earnings are forthcoming, the impact has, thus far been minimal as we’ve been expecting the drag on earnings.

Prior to Friday’s sell off, the limited earnings reports received where currency was a detrimental factor in earnings and forward guidance was greeted positively, as the news wasn’t as bad as expected.

Fortunately, the market reacted to the expected bad news in a more mature manner than I’ve been known to react to names.

But going higher on less disappointing than expected results is not a good strategy to keep banking on. There has to be something more tangible than things not being as bad as we thought, especially as energy prices may be stabilizing and interest rates moving higher.

Larry Fink has the perfect solution, although it’s a little old fashioned.

Invest in yourself.

That’s sound advice for individuals, just as it is for businesses that care about growth and prosperity.

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

American Express (NYSE:AXP) has not had a very good ride since Costco (NASDAQ:COST) announced that it was terminating its co-branding agreement with them, that allowed it to be the exclusive card accepted at its shopping warehouses. While that may not have been a huge surprise, what was a surprise was just how important of a player Costco may have been in American Express revenues. As a result, those shares have fallen more than 10% in the 2 months since the announcement of the split, which will occur in the first quarter of 2016.

American Express reported earnings this past week and dropped heavily on Friday, having done so before the overall market turned very sour. But buried in the bad news of decreased revenue, that supposedly stemmed from decreased gas sales, was the fact that they don’t anticipate further revenue declines this year.

Based on my perception of recent degradation in customer service, I think that they may have already become cost cutting through workforce reductions prior to the end of their agreement with Costco. SO while revenue may not be growing any time in 2015, the bottom line may end up better than expected.

While there may not be much in the way of growth prospects this year a rising interest rate environment will still help American Express and it is now offering a better option premium than it has in quite some time as uncertainty has taken hold.

Microsoft (NASDAQ:MSFT) and eBay (NASDAQ:EBAY) both report earnings this week and both will likely report the adverse impact of a stronger US dollar and provide guarded guidance, but if the past week is any guide the market will be understanding.

Despite the bump received from their new CEO and the bump received from having an activist pushing eBay’s Board’s buttons, Microsoft and eBay respectively have trailed the S&P 500 over the past year.

Microsoft still hasn’t recovered from its last earnings decline, although eBay has, but in the past month has been making its way back toward those near term lows as it may be getting closer to spinning off its profitable PayPal unit having just completed a 5 year non-compete contract with PayPal.

As eBay approaches that lower price level it has returned within the range that I’m comfortable buying shares. While I usually consider the sale of puts as the primary way to engage with a stock getting ready to report earnings, I wouldn’t mind owning shares and the enhanced premium offsets some of the added risk of entering a position at this point.

As with eBay, I prefer considering an earnings related trade when shares have already had some downside pressure on shares. While eBay is a better candidate in that regard, Microsoft also has a premium that will also offset some of the earnings related risk. Like eBay, the options market is anticipating a relatively sedate price move, that if correct in magnitude, even if an adverse direction, could be relatively easily managed while awaiting some recovery.

Colgate (NYSE:CL) goes ex-dividend this week and I continually tell myself that I will be someday be buying shares. As a one time Pediatric Dentist it’s probably the least I could do after a lifetime of being the fifth out of those 5 dentists on the panel. But somehow that’s never happened, to the best of my recollection.

While it does have a low beta and isn’t necessarily shares that you buy in anticipation of excitement, if those shares are not assigned during the upcoming week, there is a need to be prepared for earnings the following week and potentially the need for a longer term commitment if earnings disappoint.

I like considering Best Buy (NYSE:BBY) whenever its shares have gotten to the point of having declined 10%. It has done just that and a little bit more in the past month and does it on a fairly regular basis. But in doing so over the past 14 months the lows have been higher as have the highs along the way.

That has been a good formula for considering either adding shares and selling calls or selling puts. In either case the premium has long reflected the risk, but the risk appears to be definable and at lest there aren’t too many currency exchange concerns to cloud whatever issues Best Buy faces as it is currently once again relevant.

Bed Bath and Beyond (NASDAQ:BBBY) was on my list last week as a potential candidate to join the portfolio. However, with cash reserves low, it wasn’t a very active week, with only a single new position opened.

This week, despite the sell-off on Friday, I had the good fortune of still being able to see a number of positions get assigned and was able to replenish cash reserves. With a 2.5% decline last week, considerably worse than the S&P 500, Bed Bath and Beyond added to its post-earnings losses from the previous week, as it often does after previous earnings declines. But what it also has done after those declines is to relatively quickly recover.

I think the weakness this week brings us simply one week closer to recovery and while waiting for that recovery the shares do allow you to generate a competitive return for option sales. Because of that anticipated recovery, I might consider using an out of the money option and a time frame longer than a single week, however, particularly as Friday’s market weakness may need its own time for recovery.

Finally, SanDisk (NASDAQ:SNDK) didn’t disappoint when it announced its earnings this past week. It was certainly in line with all of the warnings that it had given over the past month and may make many wonder whether or not they may be Jack Welch’s new poster child for dysfunction at the C-suite and board levels.

With everyone seeming to pile on in their criticism of the company and calling for even more downward price pressure, I’m reminded that SanDisk has been down this path before and arose for the ashes that others had defined for it.

The year to date descent in share price has been impressive and it is only a matter of great luck that I had shares assigned right before another one of its precipitous plunges.

This one is definitely not one for the faint of heart, but I would consider entering a position through the sale of puts, rolling them over, if faced with assignment. However, with an upcoming ex-dividend date the following week, I’d be more inclined to take assignment if faced with it, collect the dividend and work the call sale side of share ownership.

 

Traditional Stocks: American Express, Bed Bath and Beyond

Momentum Stocks: Best Buy, SanDisk

Double Dip Dividend: Colgate (4/21)

Premiums Enhanced by Earnings: eBay (4/22 PM), Microsoft (4/23 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.

Feb282015

Weekend Update – March 1, 2015

Weekend Update Comment

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved oppositely to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 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.