Weekend Update – March 13, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What goes up must come down.

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

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

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

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

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

Add Astra Zeneca (AZN) to that list.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Traditional Stocks: Astra Zeneca

Momentum Stocks: GameStop, Williams Companies

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

Premiums Enhanced by Earnings: none

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