Weekend Update – February 8, 2015

There’s not too much doubt that this past week had a character that was very different from nearly every week that had preceded it thus far in 2015, which has been predominated by sad faces.

The problem encountered in January and helping to create a sea of sad faces is that we were all expecting to begin seeing evidence of an improving economy. That kind of anticipation timed along with what we often believe to be a traditionally positive January market easily set the stage for disappointment.

The narrative that seemed so logical and convincing included more jobs, higher wages and newfound personal wealth due to slashed energy prices. The problem, though, was that when the time came for corroborating data to take the narrative into the realm of non-fiction it just wasn’t on the same page.

Retail Sales weren’t what we were expecting and neither was the GDP. Manufacturing data was falling and the early results from earnings season were less than stellar, as good news failed to materialize or coalesce into a coherent story in support of the narrative.

However, this past week caught glimpses of good news to come, as some prominent national retailers provided improved guidance that was finally in line with the theory that we had come to accept as gospel. Finally there was some indication that lower energy prices were going to result in more discretionary spending. What was especially encouraging was that the improvement on the retail side was no longer being confined to the more luxurious end of the spectrum.

I preferred this week’s “happy face” version of 2015, even if the week did end on a little bit of a down note after a day that featured a near flawless “Employment Situation Report,” that included some sizeable revisions to previous months.

In a perfect example of the concept that “as an investor and a consumer you can not have your cake and eat it, too” the market went higher, but so did 10 Year Treasury rates and energy prices, but within reason that can be a good trade-off.

2015 has been pretty dizzying thus far. All you have to do is take a look at an S&P 500 chart since having reached market highs at the end of December 2014. It doesn’t take long to realize that market tests have been coming at a far greater frequency or on a more compressed time frame than they had been coming in almost 3 years.

The good news is that the alternating plunges and surges are creeping into option premium pricing for those selling. The bad news is that the alternating plunges and surges are creeping into option premium pricing for those buying.

The activity seen in 2015 will lead some to believe that it demonstrates the market’s resilience, while others will be less optimistic and point out that large moves higher, as have been commonplace in 2015 are typically seen in or approaching bear markets.

Fortunately, we will have hindsight to guide us.

Until that point that hindsight kicks in there is the problem of deciding whether it’s a smiling face or a sad face that awaits in the near future.

With the otherwise under-appreciated JOLT Survey, which Janet Yellen has said held increasing importance as it may indicate workforce optimism and another Retail Sales report coming this week, there may be more reason to add to the trickle of evidence that may validate last week’s happy faces.

Of course, while official government reports and data are certainly meaningful, despite a propensity toward revision, the really meaningful data may start coming in just a few weeks. At that time the major retailers begin to release their earnings. Perhaps more importantly than those earnings ending in December 2014, they will have also had 2 additional months of observation to either validate or negate the narrative and also provide changed forward guidance.

I have my “happy face” mask within easy reach, although the sad face is never far away.

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

One of the reasons that I like Fastenal (NASDAQ:FAST) so much is that it is prone to large and decisive movements, but is otherwise a fairly staid stock that has a nice habit of seeing its price revert toward the mean.

Fastenal reported good earnings just a few weeks ago, but this past week reported weaker than expected January sales resulting in another of those decisive movements that rippled through to its competitors, as well.

The hindsight tool indicates that over the past few years these kind of drops from about the $45 level have proven to be a good time to purchase or add shares. While only offering a monthly options contract there are now only 2 weeks remaining on the February 2015 cycle. However, during the 10 occasions that I have owned shares in the past 18 months I’ve held them through only a single monthly option cycle just once, so it does tend to be a longer holding.

While “old tech” was weak last weak and Microsoft (NASDAQ:MSFT) has been weak since releasing its earnings, a nearly 10% drop seems excessive, but a welcome return to a price level last seen 6 months ago.

Among my favorite kind of option contract sales, but ones that I only infrequently get to execute, are for those going ex-dividend on a Monday. In such cases, early assignment has to occur on the previous Friday. If selling an option contract expiring the same week as the ex-dividend date and shares are assigned early to capture the dividend, the contract seller won’t get the dividend, but does get an additional week of premium and a return of cash from the assignment which can then be re-invested to generate more income.

Microsoft shares go ex-dividend on Tuesday February 17th, the day after the Presidents Day holiday. That means if an option contract is to be exercised early it must be done on the preceding Friday and may offer one of those opportunities to benefit whether the option is exercised early or not.

Royal Dutch Shell (NYSE:RDS.A) also goes ex-dividend this week. While oil was nearly 10% higher for the week and may reasonably be expected to undergo some short term profit taking, as too many have foregone their bearish sentiment, Royal Dutch Shell’s decision to decrease its capital expenditures is just another in the steps necessary to nudge the supply-demand equilibrium toward a balance favoring price.

The process, however, unless there is an unexpected event or change in policy, such as Saudi Arabia cutting production in exchange for Russia’s support of the Syrian regime, is a slow one. I would, therefore, look at a holding in Royal Dutch Shell to be of a longer term nature and the absence of weekly options removes some of the risk of short term volatility.

However, if it’s volatility that you’re looking for, then Market Vectors Gold Miners ETF (NYSEARCA:GDX) may be just the thing, as precious metals has seen a very clear increase in its volatility and has trickled down to the level of the miners.

Over the past 2 months this has been one of my favorite trades as I’ve rolled over existing positions numerous times, sometimes more than once in a week and even electing to rollover when assignment was nearly certain in order to keep deriving income from the holding.

As seen this past week and nearly every week in the past 2 months these shares can move up and down very quickly, but for those who believe that precious metals or some proxy should be in the speculative portion of their portfolio, this may be a suitable addition, especially as uncertainty abounds in stocks, bonds, currencies and metals.

While I only have room for one energy sector position, Marathon Oil also goes ex-dividend this week and has reasons to be considered.

While its dividend is far below that of Royal Dutch Shell, it has also suffered a far greater decline from its recent high level. While I think that decline near its end, it does have earnings to report on February 18, 2015, a week after its ex-dividend date.

Marathon Oil (NYSE:MRO), unlike Royal Dutch Shell does offer weekly option contracts providing opportunities to focus on either or both events by selecting different expiration dates. In the case of Marathon, as we’ve seen with many others in the energy sector reporting their earnings, the reality has been better than the fears and shares have done well in the aftermath. With that in mind I look at Marathon as potentially offering a good dividend and upside potential from earnings, in addition to an option premium that;’s enhanced by the upcoming earnings as well as the added volatility surrounding energy names.

International Paper (NYSE:IP) also is ex-dividend this week and while it is near its 52 week high and 20% higher from its earnings release in October 2014, its near term prospects don’t appear to hold a return to that level. Instead, I think that there is still room for some capital appreciation, or at least continuing to trade in its recent range, while offering the opportunity to accumulate premiums.

The company has been very shareholder friendly with spin-offs, increasing share buybacks and dividend increases in each of the past 5 years. That’s a nice combination for those who need something to offset the lack of excitement in its actual businesses.

After announcing record earnings, but weak forward guidance, shares of Activision Blizzard (NASDAQ:ATVI) briefly suffered a sharp fall. However, when there was some opportunity to really evaluate the increased share buyback announced and the increased dividend analysts dismissed the importance of the lowered guidance and shares recovered.

Other than experiencing some currency headwinds, margins on its products are expected to increase as it its share of digital download revenues. After all, what is a “millennial” going to spend their newly found cash on if not gaming? In return, Activision may have some upside share potential supported by its buyback and a nice option premium to help atone for the adventure that may await with share ownership.

Finally, what’s a day without the report of a new cyber-hack and the theft of personal data? Last week’s report of a massive and successful attack of a healthcare insurer, that made away with personally identifying data and not just credit card numbers, may be the start of massive headaches for many in the 14 states served by that insurer who may find that joining the witness protection program and changing their name and date of birth may be the best remedy.

While retaining FireEye (NASDAQ:FEYE) after the hack isn’t terribly different from closing the barn door a little too late, it certainly raises the profile of companies in the cyber-security arena even higher.

FireEye reports earnings this week and if you only looked at a 6 month chart you would think that it had done well in scratching its way back toward its August 2014 level. However, a look beyond 6 months shows just how far shares have fallen in the past year.

The option market is implying an 11.7% move upon earnings and based on past history that may be an under-estimate of what may be possible. However, one may be able to obtain a 1% ROI by selling a weekly put option at a strike level that is about 15.7% Friday’s closing price.

However, since shares are already up about 12% in the past week, I would consider the sale of puts only if there is a meaningful price decline prior to earnings, or if that doesn’t occur, if there is a significant decline after earnings, as FireEye has disappointed in the past and it’s a fickle stock market that has to decide whether the past is more important than the future.

Traditional Stocks: Fastenal

Momentum Stocks: Activision Blizzard, Market Vectors Gold Miners ETF

Double Dip Dividend: International Paper , Marathon Oil (2/11), Microsoft (2/17), Royal Dutch Shell (2/11)

Premiums Enhanced by Earnings: FireEye (2/11 PM)

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

 

Weekend Update – August 4, 2013

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.