Weekend Update – November 8, 2015

For a very brief period of time before October’s release of the Employment Situation Report and for about 90 minutes afterward, the stock market had started doing something we hadn’t seen for quite a while.

Surprisingly, traders had been interpreting economic news in a rational sort of way. Normally, you wouldn’t have to use the word "surprisingly" to describe that kind of behavior, but for the preceding few years the market was focused on just how great the Federal Reserve’s monetary policy was for equity investors and expressed fear at anything that would take away their easy access to cheap money or would make alternative investments more competitive.

The greatest increment of growth in our stock market over the past few years occurred when bad news was considered good and good news was considered good.

To be more precise, however, that greatest increment of growth occurred when there was the absence of good economic news in the United States and the presence of good economic news in China.

What that meant was that good economic news in the United States was most often greeted as being a threat. Meanwhile back in the good old days when China was reporting one unbelievable quarter after another, their good economic news fueled the fortunes of many US companies doing business there.

Then the news from China began to falter and we were at a very odd intersection when the market was achieving new highs even as so many companies were in correction mode as a Chinese slowdown and supremacy of American currency conspired to offset the continuing gift from the FOMC.

At the time of the release of October’s Employment Situation Report the market initially took the stunningly low number and downward revisions to previous months as reflecting a sputtering economy and added to the losses that started some 6 weeks earlier and that had finally taken the market into a long overdue correction.

90 minutes later came an end to rational behavior and the market rallied in the belief that the bad news on employment could only mean a continuation of low interest rates.

In other words, stock market investors, particularly the institutions that drive the trends were of the belief that fewer people going back to work was something that was good for those in a position to put money to work in the stock market.

Of course, they would never come right out and say that. Instead, there was surely some proprietary algorithm at work that set up a cascading avalanche of buy orders or some technical factors that conveniently removed all human emotion and empathy from the equation.

As bad as the employment numbers seemed, the real surprise came a few weeks later as the FOMC emerged from its meeting and despite not raising rates indicated that employment gains at barely above the same level everyone had taken to be disappointing would actually be sufficient to justify an interest rate increase.

The same kind of reversal that had been seen earlier in the month after the Employment Situation Report was digested was also seen after the most recent FOMC Statement release had started settling into the minds of traders. However, instead of taking the market off in an inappropriate direction, there came the realization that an increase in interest rates can only mean that the economy is improving and that can only be a good thing.

Fast forward a couple of weeks to this past week and with the uncertainty of the week ending release of the Employment Situation Report the market went nicely higher to open the first 2 days of trading.

There seemed to be a message being sent that the market was ready to once again accept an imminent interest rate increase, just as it had done a few months prior.

That seemed like a very adult-like sort of thing to do.

The real surprise came when the number of new jobs was reported to be nearly double that of the previous month and was coupled with reports of the lowest unemployment rate in almost 8 years and with a large increase in wages.

Most any other day over the past few years and that combination of news would have sent the market swooning enough to make even the fattest finger proud.

With all of those people now heading back to work and being in a position to begin spending their money in a long overdue return to conspicuous consumption, this coming week’s slew of national retailers reporting earnings may provide some real insight into the true health of the economy.

While the results of the past quarter may not yet fully reflect the improving fortunes of the workforce, I’m more inclined to listen closely to the forecasting abilities of Terry Lundgren, CEO of Macy’s (M) and his fellow retail chieftains than to most any nation’s official data set.

Hopefully, the good employment news of last week will be one of many more good pieces to come and will continue to be accepted for what they truly represent.

While the cycle of increasing workforce participation, rising wages and increased discretionary spending may stop being a virtuous one at some point, that point appears to be far off into the future and for now, I would trade off the high volatility that I usually crave for some sustained move higher that reflects some real heat in the economy.

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

What better paired trade could there be than Aetna (AET) and Altria (MO)?

I don’t mean that in terms of making the concurrent trades by taking a long position in one and a short position in the other, but rather on the basis of their respective businesses.

In the long term, Altria products will likely hasten your death while still making lots of money in the process and Aetna’s products will begrudgingly try to delay your death, being now forced to do so even when the costs of doing so will exceed the premiums being paid.

Either way, you lose, although there may be some room for a winner or two in either or both of these positions as they both had bad weeks even as the broader market finished higher for the 6th consecutive week.

Both have, in fact, badly trailed the S&P 500 since it started its rally after the October Employment Situation Report.

Aetna, although still sporting a low "beta," a measure of volatility, has been quite volatile of late and its option premium is reflecting that recent volatility even as overall volatility has returned to its historically low levels for the broader market.

With Aetna having recently reported earnings and doing what so many have done, that is beating on earnings, but missing on revenues, it had suffered a nearly 8% decline from its spike upon earnings.

That seems like a reasonable place to consider wading in, particularly with optimistic forward guidance projections and a very nice selection of option premiums.

Walgreens Boots Alliance (WBA) is ex-dividend this week. Although its dividend is well below that of dividend paying stocks in the S&P 500 its recent proposal to buy competitor Rite Aid (RAD) has increased its volatility and made it more appealing of a dividend related trade.

With some displeasure already being expressed over the buyout, Walgreens Boots Alliance will surely do the expected and sell or close some existing stores of both brands and move on with things. But until then, the premiums will likely continue somewhat elevated as Walgreens seeks to further spread its footprint across the globe.

With about a 10% drop since reporting earnings at the end of October there isn’t too much reason to suspect that it will be single out from the broader market to go much lower, unless some very significant and loud opposition to its expansion plans surfaces. With the Thanksgiving holiday rapidly approaching, I don’t think that those objections are going to be voiced in the next week or two.

International Paper (IP) is also ex-dividend this coming week and I think that I’m ready to finally add some shares to an existing lot. Like many other stocks in the past year, it’s road to recovery has been unusually slow and it is a stock that has been among those falling on hard times even as the market rallied to its highs.

While it has recovered quite a bit from its recent low, International Paper has given back some of that gain since reporting earnings last week.

Its price is now near, although still lower than the range at which I like to consider buying or adding shares. The impending dividend is often a catalyst for considering a purchase and that is definitely the case as it goes ex-dividend in a few days.

Its premium is not overly generous, as the option market isn’t perceiving too much uncertainty in the coming week, but the stock does offer a very nice dividend and I may consider using an extended option to try and make it easier to recoup the share price drop due to its dividend distribution. 

Macy’s reports earnings this week and it has had a rough ride after each of its last two earnings reports. When Macy’s is the one reporting store closures, you know that something is a miss in retail or at least some real sea change is occurring.

The fact that the sea change is now showing profits at Amazon (AMZN) for a second consecutive quarter may spell bad things for Macy’s.

The options market must see things precisely that way, because it is implying a 9.2% move in Macy’s next week, which is unusually large for it, although no doubt having taken those past two quarters into account.

Normally, I look for opportunities to sell puts on those companies reporting earnings when I can achieve a 1% ROI on that sale by selecting a strike price outside of the range implied by the option market.

In this case that’s possible, although utilizing a strike that’s 10% below Friday’s close doesn’t offer too large of a margin for error.

However, I think that CEO Lundgren is going to breathe some life into shares with his guidance. I think he understands the consumer as well as anyone, just as he had some keen insight long before anyone else, when explaining why the energy and gas price dividend being received by consumers wasn’t finding its way to retailers, nearly a year ago.

Finally, the most interesting trade of the week may be Target (TGT).

Actually, it may be a trade that takes 2 weeks to play out as the stock is ex-dividend on Monday of the following week and then reports earnings two days later.

Being ex-dividend on a Monday means that if assigned early it would have to occur by Friday of this coming week. However, due to earnings being released the following week the option premiums are significantly enhanced.

What that offers is the opportunity to consider buying shares and selling an extended weekly, deep in the money call with the aim of seeing the shares assigned early.

For example, at Friday’s close of $77.21, the sale of a November 20, 2015 $75.50 call would provide a premium of $2.60.

That would leave a net of $0.89 if shares were assigned early, or an ROI of 1.15% for the 5 day holding, with shares more likely to be assigned early the more Target closes above $76.06 by the close of Friday’s trading.

However, if not assigned early that ROI could climb to 1.9% for the 2 week holding period even if Target shares fall by as much as 2.2% upon earnings.

So maybe it’s not always a misplaced sense of logic to consider bad news as being a source for good things to come.

 

Traditional Stocks: Aetna, Altria

Momentum Stocks: none

Double-Dip Dividend: International Paper (11/12 $0.44), Target (11/16 $0.56), Walgreens Boots Alliance (11/12 $0.36)

Premiums Enhanced by Earnings: Macy’s (11/11 AM)

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

Weekend Update – September 6, 2015

Stop and take a break.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This week, the situation is different.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stock: Pfizer

Momentum Stock: none

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

Premiums Enhanced by Earnings: LuLuLemon Athletica (9/10 AM), Palo Alto Networks (9/9 PM)

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

Weekend Update – June 7, 2015

 

In statistics, there is a concept of “degrees of freedom.”

It is the number of independent ways by which a dynamic system can move, without violating any constraint imposed upon it.

For example, if you know that you have a dollar in change distributed between your 2 pockets and one of those pockets has $0.75 in it, there aren’t too many possibilities for what the other pocket will contain. That’s an example of a single degree of freedom. However, as soon as you throw a third pocket into the mix there are an additional 25 permutations possible, as a second degree of freedom opens up lots of possibilities.

Poor Janet Yellen. So few possibilities and so many constraints tying her up.

Since US interest rates can’t go much lower, she doesn’t have too much choice in their direction. She has no choice but to raise rates.

Eventually.

Her only freedom is in the timing of action. If you’re married to data, as is now being professed, she has to balance the opinion of a well regarded economist with the latest employment data release and the prospects of upwardly revised GDP statistics.

Her degrees of freedom situation got a little muddled this past week as Christine Lagarde, who is the Managing Director of the International Monetary Fund, urged her to stay in line with the European Central Bank and keep interest rates low. At the same time the Employment Situation Report, released on Friday morning came in with job growth stronger than expected.

As the popular song once asked “should I stay or should I go?” is the kind of decision facing Janet Yellen right now and regardless of her decision, it’s going to be second guessed to death and much more likely to receive blame than credit for whatever near term or longer term outcomes there may be.

Doing nothing may be the safest decision, although this week the US bond market made its feelings known as rates moved in the only direction that makes sense.

That’s because suddenly the data has shifted the discussion back to the potential for the announcement of an interest rate increase as early as June 17th, the date of the next FOMC Statement release. That’s happened within days of the discussion having been about whether that increase would even occur in 2015.

With competing pressures of being out of synchrony with the direction of rates in the rest of the world and the reality of an economy that now may actually be growing at a stronger rate than had been believed, inaction would seem to be the obvious path to take.

Being tied up makes it easier to fail to act, but I’m betting that if any one can break free of the duct tape constraints that seek to bind her, it will be Janet Yellen.

The expression became long ago hackneyed, but while we all await a decision of interest rates, I suspect that Janet Yellen will break out of the box. As Bernanke before her, she will put her own twist on our narrow and limited expectations, leaving Christine Lagarde to realize that being late to the game is not a good reason to heed advice.

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

Intel (NASDAQ:INTC) had a really terrible week last week as the news that everyone had come to expect regarding its intentions with Altera (NASDAQ:ALTR) became confirmed.

The funny part, although not if you’re an Intel shareholder, is that when rumors first surfaced earlier in the year, the initial response was positive for Intel’s share price.

Not so much, though, as rumors became news and suddenly every one started questioning intel’s strategy with the acquisition.

As weak as the overall market was this past week, it was well ahead of Intel, which lost nearly 8%. That drop in price has made the shares once again appealing, as its CEO, Brian Krzanich, shouldn’t strike anyone as being frivolous, particularly as it comes to operations, having previously served as Intel’s COO. I would guess that Krzanich can sense a strategic fit better than most at a company where he has spent nearly 33 years of his life.

With Chuck Robbins set to start soon as the new CEO at Cisco (NASDAQ:CSCO), more executive level changes were announced this past week, as shares also well under-performed the S&P 500 for the week.

Although nowhere as severe as Intel’s weekly decline, the drop in Cisco’s shares bring them closer to an appealing price once again, as its ex-dividend data nears in a few weeks.

While shares are still a little higher priced than I might like to initiate a position, its recent weakness hasn’t had very much basis. Robbins’ new team, even though comprised of many Cisco insiders, is likely to hit the ground running with strategic initiatives and will probably be more focused on near term victories, than was outgoing CEO John Chambers.

I think that creates short term opportunities even as Robbins may pull out varied accounting tricks in the waning days of June in order to make the next quarter’s earnings pale in comparison to the subsequent quarter, thereby creating a positive early image of his leadership.

Altria (NYSE:MO) and Merck (NYSE:MRK) are both ex-dividend this week and both offer a very attractive dividend. While one seeks to improve people’s lives through better chemistry, the other takes a different path.

Tobacco companies faced some challenges last week as the market didn’t react well to news of a $15 billion Canadian court penalty. Nor did it react well to news that a lawsuit regarding package labeling against the FDA was being dropped. A nearly 6% drop for the week is enough evidence of market displeasure.

Those drops helped to bring shares near some support levels just in time for the dividend and surprisingly good option premiums. While I don’t take any particular delight in the products or in the consequences of their use, there has never been a very good time to bet against their continued ability to withstand challenges.

That ability to withstand challenges is one of the signs of a great company and Merck falls into that category, as well.

Most often, companies like Altria and Merck, that have better than average dividend yields and whose dividend is about the size of a strike price unit or larger, in this case $0.50, are difficult to double dip in an effort to have some of the share price reduction brought about by going ex-dividend get subsidized by the option premium. However, with pharmaceutical companies being in play of late, the option premiums are higher than they have been for quite some time, even during an ex-dividend week.

Merck is rarely a candidate for a double dip dividend trade, but may be so this coming week, having also concluded a very weak past few trading days that highlighted a number of drug study trial results.

Finally, Williams Company (NYSE:WMB) is also ex-dividend this week having fallen sharply following the very positive reception it received after announcing the planned purchase of the remainder of its pipeline business, Williams Partners (NYSE:WPZ).

With a nearly 10% decline in the past month since that announcement, as with both Altria and Merck, it offers a better than average dividend yield and a dividend that is greater than its strike price units. However, it too, is now offering an option premium that allows for double dipping that is so often now possible or feasible.

However, as with Altria, the recent decline seems to have been over-exaggerated and rather than selling an in the money call in an attempt to double dip on dividend and premium, I think that i may be inclined to forgo some of that double dipping in exchange for capital gains on the underlying shares by using out of the money options.

Either way, it’s an exercise in greed, but I like having the increased degree of freedom to do so.

Traditional Stocks: Cisco, Intel

Momentum Stocks: none

Double-Dip Dividend: Altria (6/11), Williams Company (6/10), Merck (6/11)

Premiums Enhanced by Earnings: none

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

Weekend Update – March 15, 2015

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

Premiums Enhanced by Earnings: none

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

Weekend Update – August 31, 2014

You really can’t blame the markets for wanting to remain ignorant of what is going on around it.

When you’re having a party that just doesn’t seem to want to end the last thing you want to do is answer that unexpected knock on the door, especially when you can see a flashing red and blue light projected onto your walls.

The recent pattern has been a rational one in that any bad news has been treated as bad news. The market has demonstrated a great deal of nervousness surrounding uncertainty, particularly of a geo-political nature and there has been no shortage of that kind of news lately.

On the other hand, the market has thrived during a summer time environment that has been devoid of any news. Over the past four weeks that market has had its climb higher interrupted briefly only by occasional rumors of geo-political conflict.

Given the market’s reaction to such news which seemingly is accelerating from different corners of the world, the solution is fairly simple. But it was only this week that the obvious solution was put into action. Like any young child who wants only to do what he wants to do, the strategy is to hear only what you want to hear and ignore the rest.

Had the events of this week occurred earlier in the summer we might have been looking at another of the mini-corrections we’ve seen over the past two years and perhaps more. The additive impact of learning of Russian soldiers crossing the Ukraine border, Great Britain’s decision to elevate their Terror Alert level to “Severe” and President Obama’s comment that the United States did not yet have a strategy to  deal with ISIS, would have put a pause to any buying spree.

Instead, this week we heard none of those warnings and simply marched higher to even more new record closes, even ignoring the traditional warning to not go into a weekend of uncertainty with net long positions.

To compound the flagrant flaunting the market closed at another new high as we entered into a long holiday weekend. As we return to trading after its celebration the incentive to continue ignoring the world and environment around us can only be reinforced when learning that this past month was the best performing month of August in more than 10 years.

Marking the fourth consecutive week moving higher, the July worries of spiking volatility and a declining market are ancient history, occurring back in the days when we actually cared and actually listened.

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

Bank of America (BAC) may be a good example of ignoring news, although it could also be an example of  the relief that accompanies the baring of news. The finality of its recent $17 billion settlement stemming from its role in the financial crisis was a spur to the financial sector.

Shares go ex-dividend this week and represent the first distribution of its newly raised dividend. While still nothing worthy of chasing and despite the recent climb higher, the elimination of such significant uncertainty can see shares trading increasingly on fundamentals and increasingly becoming less of a speculative purchase as its beta has plunged in the past year.

With thoughts of conflict related risk continuing to be on my mind there’s reason to consider positions that may have some relative immunity to those risks. This week, however, the reward for selling options is unusually low. Not only is the extraordinarily depressed volatility so adversely impacting those premiums, but there are only four days of time value during this trade shortened week. Looking to use something other than a weekly option doesn’t offer much in the way of relief from the low volatility, so I’m not terribly enthusiastic about spending down cash reserves this coming week, particularly at market highs.

Still, there can always be an opportunity in the making. With the exceptions of the first and last selections for this week, like last week I’m drawn to positions that have under-performed the S&P 500 during the summer’s advance.

^SPX ChartThere was a time that Altria (MO) was one of my favorite stocks. Not one of my favorite companies, just one of my favorite stocks, thanks to drawing on the logic of the expression “hate the sin and not the sinner.”

Back in the old days, before it spun off Philip Morris (PM) it was one of those “triple threat” stocks. It offered a great dividend, great option premiums and the opportunity for share gains, as well. Even better, it did so with relatively little risk.

These days it’s not a very exciting stock, although it still offers a great dividend, but not a terribly compelling option premium, especially as the ex-dividend date approaches. However, during a time when geo-political events may take center stage, there may be some added safety in a company that is rarely associated with the word “safe,” other than in a negative context.

Colgate Palmolive (CL) isn’t a terribly exciting stock, but in the face of unwanted excitement, who needs to add to that fiery mix? Last week I added shares of Kellogg (K), another boring kind of position, but both represent some flight to safety. 

Trailing the S&P 500 by 8% during the summer, shares of Colgate Palmolive could reasonably be expected to have an additional degree of safety afforded from that recent decline and that adds to its appeal at a time when risk may be otherwise be an equal opportunity destroyer of assets.

YUM Brands (YUM) and Las Vegas Sands (LVS) both have much of their fortunes tied up in China and both have come down quite a bit during the summer.

YUM Brands has shown some stability of late and I would be happy to see it trading in the doldrums for a while, as that’s the best way to accumulate option premiums. WHile doing business is always a risk in China, there is, at least, little concern for exposure to other worldwide risks and YUM may have now weathered its latest food safety challenge.

Las Vegas Sands, on the other hand, may not yet have seen the bottom to the concerns related to the vibrancy of gaming in Macao. However, the concerns now seem to be overdo and expectations seem to have been sufficiently lowered, setting the stage for upside surprises, as has been the situation in the past. As with concerns regarding decreased business at YUM due to economic downturns, once you get the taste for fast food or gambling, it’s hard to cut down on their addictive hold.

T-Mobile (TMUS), despite the high profile it maintains, thanks to the efforts of its CEO, John Legere, has somehow still managed to trail the S&P500 during the summer. This past week’s comments by parent Deutsche Telecom (DTEGY) seemed to imply that they would be happy to sell their interests for a $35 price on shares. They may be willing to take even less if a potential suitor would also take possession of John Legere, no questions asked.

I think that in the longer term the T-Mobile story will not end well, as there is reason to question the sustainability of its strategy to attract customers and its limited spectrum. It needs a partner with both cash and spectrum. However, since I don;t particularly look at the longer term picture when looking for weekly selections, I’m interested in replacing the shares that were assigned this past week, as its premium is very attractive.

Whole Foods (WFM) is another position that I had assigned this past week, while I still sit on a much more expensive lot. On the slightest pullback in price, or even stability in share price, I would consider a re-purchase of shares, as it appears Whole FOods is finding considerable support at its current level and has digested a year’s worth of bad news.

In an environment that has witnessed significant erosion in option premiums, Whole Foods has recently started moving in the opposite direction. Its option premiums have seen an increase in price, probably reflecting broader belief that shares are under-valued and ready to move higher. Although I’ve been adding shares in an attempt to offset paper losses from that more expensive lot, I believe that any new positions are warranted on their own at this level and would even consider rolling over positions that are likely to be assigned in order to accumulate these enriched premiums.

I currently have no technology sector holdings and have been anxious to add some. With distrust of “new technology” and “old technology” having appreciated so much in the past few months, it has been difficult to find suitable candidates.

Both SanDisk (SNDK) and QualComm (QCOM) have failed to match the performance recently of the S&P 500 and may be worthy of some consideration, although they both may have some more downside risk potential during a period of market uncertainty.

Among challenges that QualComm may face is that it is not collecting payment for its products. That is just another of the myriad of problems that may confront those doing business in China, as QualComm, and others, such as Microsoft (MSFT), may not be receiving sufficient licensing fee payments due to under-reporting of device sales.

In addition, it may also be facing a challenge to its supremacy in providing the chips that connect devices to cellular networks worldwide as Intel (INTC) and others may be poised to add to their market share at QualComm’s expense.

For those believing that the bad news has now been factored into QualComm’s share price, having resulted in nearly a 7% loss as compared to the S&P 500 performance, there may be opportunity to establish a position at this point, although continued adverse news could test support some 6% lower.

SanDisk certainly didn’t inspire much confidence this week as a number of executives and directors sold a portion of their positions.

I don’t have any particular bias as to the meaning of such sales. SanDisk’s price trajectory over the past year certainly leaves significant downside risk, however, the management of this company has consistently steered it against a torrent of  pessimistic waves, as it has survived commoditization of its core products. The risk of share ownership is mitigated by its option premium, that has resisted some of the general declines seen elsewhere, perhaps reflective of the perceived risk.

Finally, Coach (COH) has recently been in my doghouse, despite the fact that it has been a very reliable friend over the course of the past two years. But human nature being what it is, it’s hard to escape the question “what have you done for me lately?”

That’s the case because my most recent lot of Coach was purchased after earnings when it fell sharply and then surprised me by continuing to do so in a significant manner afterward, as well. Unlike with some other earnings related drops over the past two years this most recent one has had an extended recovery period, but I think that it is finally getting started.

The timing may be helped a little bit with shares going ex-dividend this week. That dividend is presumably safe, as management has committed toward maintaining it, although some have questioned how long Coach can continue to do so.

I choose not to listen to those fears.

Traditional Stocks: Altria, Colgate Palmolive, QualComm, Whole Foods, YUM Brands

Momentum:  Las Vegas Sands, SanDisk, T-Mobile

Double Dip Dividend: Bank of America (9/3), Coach (9/5)

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.