Nov52016

Weekend Update – November 6, 2016

Weekend Update Comment

Some days we really have no clue as to what made the market move as it did, but nothing bothers us more than not knowing the reasons for everything.

We tend to like neat little answers and no untied bundles.

It starts early in life when we begin to ask the dreaded “Why?” question.

We want answers at an early stage in life even when we have no capacity to understand those answers. We also often make the mistake of querying the wrong people to answer those questions, simply on the basis of their ready availability and familiarity.

Those on the receiving end of  questions usually feel some obligation to provide an answer even if poorly equipped to do so.

While the market has now gone into a 9 consecutive day decline, it seems only natural to wonder why that’s been happening and of course, some people, have to offer their expert explanation.

It is of course understandable that the question is posed, as earnings haven’t been terrible and neither have economic data. Yet, a 9 day decline hasn’t happened since 1980 and has taken the market into a stealth 5% decline.

Sometimes “not too hot and not too cold” is just the perfect place to be, although from a stock market investor’s perspective, there is always the future that has to be addressed and then discounted.

In fact, with the release of the Employment Situation Report this past Friday, there may be enough time to cast off “fear of the known” as investors can acclimate to the stronger probability that the FOMC will finally move to increase interest rates next month. 

So why was the past week as it was and please don’t tell me “it is as it is,” which is an answer that even a three year old asking the obligatory “why” question would never find acceptable.

In the absence of any real reason and even in the absence of any ability to twist news into the opposite of what it really is, sometimes you just have to make up an answer.

As parents, many of us have done that with our children and have learned that if you answer with an air of confidence and authority, you’ve done your job, even if you have no clue as to the real answer to the question posed.

From the day that news came forth that additional emails may have been found related to the server scandal so inartfully responded to by one of the Presidential candidates, the market decline has been largely attributed to the fear that the other Presidential candidate’s electability was enhanced.

Of course, the reaction of the market when that news was initially released was likely not coincidental, so it gave a new reason to explain the unexplainable going forward and that excuse for the market’s weakness this past week was used in great abundance.

The investor class, if that association is correct, is fearful of the unknown that might accompany the election of an untested billionaire, who may not be as wealthy as he regularly portrays himself to be. 

Or perhaps, given all of the wildness accompanying this entire campaign, the electorate is worried about whether either of the Vice Presidential candidates is equipped to take the top job when indictments may come through during the Inaugural Ball.

But that still leaves us this coming week, when the market will wake up on Wednesday morning, likely having perfect knowledge of the election results, assuming no repeat of 2000.

If the assertions this past week are accurate and the billionaire has to turn his interests back to his business ventures, the expectation that the market would bounce nicely higher would be reasonable.

On the other hand, there’s always that unknown and if instead of focusing on business, the focus is on creating a Presidential Cabinet, we may pine for the days of a simple 5% decline.

The potential for an instant, even if short lived, evaporation of wealth, could throw a little wrench into the FOMC’s well laid plans. We, and they, have waited for a year for the second of what was expected to be a series of small interest rate increases through 2016.

Even the FOMC may have to find itself dealing with the unknown, but be assured, we will be the last to know, as we come to the realization that sometimes it really is as it is.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend,

This is a week that could easily go in any direction.

With the market down 5% from its September high, it wouldn’t take very much to get to correction levels, but by the same token a bounce from last week could easily be in store if election fears aren’t materialized.

While there are those who believe that the pharmaceutical industry may have greater concerns in the event of a Clinton victory, I think that has already been largely discounted.

You could be excused for not believing that if you glanced at Pfizer’s (PFE) weekly call option premium in a week that it also happens to be ex-dividend.

With the uncertainty at hand over the election, if I do dip into already low cash reserves, I’m more inclined to want to chase a dividend and am not entirely receptive to taking on undue risk.

At its current strike price, Pfizer offers some of that safety, especially with the additional cushion of its option premium and the generous dividend.

As with many stocks that I follow, sometimes it’s just a question of awaiting a drop in price to decide to once again wade in and own shares. I believe that Pfizer is at that price and it is a company that I wouldn’t mind owning for a longer term in the event of a short term adverse price movement. For those with a longer term outlook, Pfizer may be a great addition to a LEAPS covered portfolio.

While it isn’t paying a dividend this week, or even during this current monthly option cycle, Sinclair Broadcasting (SBGI) is another stock whose share price is really appealing to me.

I’ve only owned it on 7 occasions over the past 3 years and have sometimes owned it for as long as 8 months, but never at a price this low.

Sinclair Broadcasting just reported earnings and responded well, despite a slight miss on the bottom line. 

It has, over the past years traded so predictably within a range, that at this price I would be very open to adding shares, but with its ex-dividend date coming in the early part of the December 2016 option cycle, would most likely sell a December option and would also consider the use of an out of the money option, rather than a near or in the money strike price.

While any capital intensive business, such as terrestrial broadcasting may suffer from an increasing interest rate environment, Sinclair Broadcasting keeps growing its reach and its revenues reflect that growth, having increased nearly 27% in the past year.

What’s a week without another consideration of Marathon Oil (MRO)?

Again, just like last week, I won’t be following this suggestion, because I’m already at my limit of 3 open positions, wither log shares or short puts.

Last week would have been another good week to initiate an earnings related short put position as shares bounced very nicely higher when earnings were released, but then succumbed to energy price pressures to end the week virtually unchanged.

With no reason to suspect that the sector’s volatility has come to an end and no reason to suspect that the individual name will break below its support, I think that this will be another good week to consider a position.

This time, however, with the ex-dividend date being the following Monday, there may be reason to consider going long shares and selling a 2 week dated call option in the attempt to capture the dividend.

Alternatively, a weekly put option could be sold and if in jeopardy of being assigned, simply taking assignment rather than rolling the puts over.

I did that recently with another lot of Marathon Oil shares and sold calls into its earning strength, with the hope of capturing its dividend and as much option premium as I could possibly get, for as long as I can get it if shares can continue to be confined in the $13 – $16 price range.

Finally, last week it was Coach’s (COH) time to report earnings and this week it will be Michael Kors (KORS) under scrutiny.

Coach’s reception was a good one and its shares spiked as it reported earnings early in the week, but it eventually succumbed to market pressures and end the week down 1%.

In the meantime, the days when Kors was seemingly thriving at the expense of Coach have long been over and the two are more likely to see their stock prices in lockstep these days.

That’s what makes Kors so appealing this week as the option market is implying a large price move, but there may still be opportunity despite the uncertainty being expressed.

The implied move is 10.5% and while that defines a price range of about $44 – $54, you could still derive a 1% weekly ROI by selling a put option 14.2% below Friday’s closing price.

I’m not overly anxious about spending any money this week, but this trade is an appealing one. My expectation is that Kors will have a reasonably well received earnings report and that it will come with enough time between it and election results to potentially shake off any adverse macro-market movement.

Traditional Stocks:  Sinclair Broadcasting 

Momentum Stocks: Marathon Oil

Double-Dip Dividend:  PFE (11/8 $0.30)

Premiums Enhanced by Earnings: KORS (11/10 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.

 

 

 

 

Aug272016

Weekend Update – August 28, 2016

Weekend Update Comment

I’m not entirely certain I understood what happened on Friday.

While it’s easy to understand the “one – two” punch, such as memorialized in Tennessee Ernie Ford’s song “Sixteen Tons,” it’s less easy to understand what has happened when a gift is so suddenly snatched away.

After not having attended the previous year’s Kansas City Federal Reserve Bank hosted soiree in Jackson Hole, this year Janet Yellen was there.

She was scheduled to speak on Friday morning and the market seemed to be biding its time all through the week hoping that Friday would bring some ultimate clarity.

Most expected that she would strike a more hawkish tone, but would do so in a way as to offer some comfort, rather than to instill fear, but instead of demonstrating that anticipation by buying stocks earlier in the week, traders needed the news and not the rumor.

The week was shaping up like another in a string of weeks with little to no net movement. Despite the usual series of economic reports and despite having gone through another earnings season, there was little to send markets anywhere.

Most recently, the only thing that has had any kind of an impact has been the return of the association between oil prices and the stock market and we all know that the current association can’t be one that’s sustainable.

So we waited for Friday morning.

After having sifted through that morning’s GDP release, which revealed another quarter of soft numbers, showing the economy may not have been growing very strongly, it was time to listen to what Janet Yellen was prepared to say after nearly 2 months of silence.

But first, buried within those GDP numbers was an indication that the consumer may have finally started participating in the economy by spending their money on actual consumer goods. Since 70% of the GDP is based upon consumer activity, that has to be a good sign and one that many have been waiting to see evidenced for far more than a year.

That consumer participation may have come as some news to Macy’s (M)., Kohls (KSS) and others that had little good to say about the past quarter and nothing good to say about the one upcoming.

But as with most things, messages are mixed.

In this case, though, Janet Yellen didn’t really offer a mixed message.

More precisely, however, what she said wasn’t interpreted as being a mixed message.

Investors moved the market nicely higher on hearing Yellen say that “the case for an increase in the federal funds rate has strengthened in recent months,” 

She didn’t really offer any guidance as to what else the FOMC had to see before finally raising rates, but most investors interpreted her comments as indicating that there was an even chance of that occurring at the FOMC’s December policy meeting.

They liked that.

That meant that there was still another 3 months of cheap money to play with and stock investors love cheap money as much as bond investors do not.

What stock investors apparently didn’t like was when Stanley Fischer suggested that there could still be more than one rate hike between now and the end of 2016.

In what could only be interpreted as “too much of a good thing,” the very idea of what we were all set up to expect a year ago, that is an upcoming year of small, multiple interest rate increases, began to bring sellers up front.

And so as the day and the week came to their ends, it was Stanley Fischer who ruled and demonstrated that whatever embrace investors had made of the idea of raising interest rates, it was pretty half hearted and a highly qualified endorsement.

The order of things often makes a difference.

If I knew that I was being faced with one hand that would give and the other hand that would take away, I would much prefer that the giving hand closed the show.

You can only appreciate loss if you’ve actually had something to lose and you can only really appreciate receiving a gift after having had nothing.

Unfortunately, the order of giving and taking left us with nothing but questions and uncertainty.

I’m not sure that’s what anyone intended, but if you look at the past year’s worth of statements and speeches from the various members of the FOMC, you might believe that a third mandate has been added to the Federal Reserve’s short list.

If so, they’ve been wildly successful in sowing confusion and giving and taking hope and confidence away from anyone paying attention.

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

Bristol Myers Squibb (BMY) may be a recent good example of the market’s buyers giving and the market’s sellers taking away.

It may also be a poster child for the old “you live by the sword, you die by the sword” expression, as it shares plummeted following some poorer than expected results from its late stage trials for an advanced non-small cell ling cancer drug.

That plummet took it to its yearly lows and while not too much time has passed, it may be stabilizing and ready fro participation again.

The option market, for whatever it may know, isn’t predicting too much movement in the upcoming week, but my sights are set a little longer term for this trade.

Bristol Myers Squibb is ex-dividend on October 5th, at a current 2.6% yield. It also reports earnings on October 27th.

That leaves consideration of the sale of an October 21st monthly contract in an effort to capture the dividend, capture nearly 2 months of premium and perhaps hold the stock long enough for some price recovery.

It also avoids the risk of earnings, as long as shares are assigned.

If not, I would consider rolling the expiring options over to either the November or December monthly contracts, or perhaps one of the extended weekly expiration dates.

Sinclair Broadcasting (SBGI) isn’t a terribly exciting stock, but it is one that i like to own and I’m especially drawn to it if it’s about to be ex-dividend and trading at or below the mid-point of its most recent range.

Those are all the case for Sinclair Broadcasting at the moment and I’m considering either the sale of an in the money call, with the intent of a quick exit from the position due to early assignment or a near the money strike, with the hopes of capturing the dividend and some small gains on the shares, as well.

Among the things I like about Sinclair Broadcasting is that it is relatively immune form many of those things that can weigh down stocks and that are completely unpredictable and out of anyone’s control.

Currency exchange rates, the price of oil and natural disasters come to mind. Where Sinclair broadcasting may be vulnerable, albeit along with most everyone else, is in an increasing interest rate environment, as assembling the broadcasting portfolio that it has in an expensive undertaking.

Even though my preference would be for a short term exposure, I’ve held shares before for longer time periods, partly because only monthly options are available. Additionally, if in a position to see short calls expire, I generally do not roll them over, due to their cost and reduced liquidity., unless shares are trading very close to the strike price as expiration nears.

Finally, as it always does, whenever I talk about the possibility of considering a position in Abercrombie and Fitch (ANF), it comes with advisories.

Those shares are ex-dividend this week and even as I still sit on a much more expensive lot of shares, I welcome the dividend and consider testing the waters even further to capture more of that dividend.

The problem is that the dividend is always closely associated with earnings and that’s the case this week, as well.

On a good day, Abercrombie and Fitch stock is prone to price spasms, but all bets are off when earnings are involved. Having already badly trailed the S&P 500 for the year and having fallen by about 25% from its 2016 high, there could be more downside pain, unless they know something that Macy’s doesn’t.

The option market is implying a price move of about 12% next week.

Ordinarily, I would consider the sale of puts if I thought that a 1% or more ROI for that sale could be realized at a strike price below the lower boundary predicted by options traders.

That is the case this week, but because of the dividend, my interest would be in considering a traditional buy/write, but only after earnings and only if shares fall sharply once earnings are announced on the morning before the ex-dividend date.

In that event, I might consider the sale of a deep in the money call, depending on the net premium available, in the event that deep in the money call is exercised by the buyer.

I might even consider looking at an extended weekly option, again being driven by the premium available and the resultant ROI, with or without the dividend capture being part of the calculation.

If it isn’t there may then be an opportunity to get the dividend and an option premium, with some significant downside protection.

That might be the equivalent on both hands giving.

 

Traditional Stocks: Bristol Myers Squibb

Momentum Stocks: none

Double-Dip Dividend: Abercrombie and Fitch (8/31 $0.20), Sinclair Broadcasting ((8/30 $0.18)

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.

 

 

Jul302016

Weekend Update – July 31, 2016

Weekend Update Comment

Let me get this straight.

The people sequestered in their nearly meeting for 2 days in Washington and who only have to consider monetary policy in the context of a dual mandate are the smartest guys in the room?

We often hear the phrase “the smartest guys in the room.”

Sometimes it’s meant as a compliment and sometimes there may be a bit of sarcasm attached to its use.

I don’t know if anyone can sincerely have any doubt about the quality of the intellect around the table at which members of the FOMC convene to make and implement policy.

While there may be some subjective baggage that each carries to the table, the frequent reference to its decisions being “data drive” would have you believe that the best and brightest minds would be objectively assessing the stream of data and projecting their meaning in concert with one another.

One of the hallmarks of being among the smartest in the room is that you can see, or at least are expected to see what the future is more likely to hold than can the person in the next room. After all, whether you’re the smartest in the room and happen to be at Goldman Sachs (GS) or at the Federal Reserve, no one is paying you to predict the past.

If you’re a Goldman Sachs shareholder and you’re using its share price as a measure, you may have been wondering if the smarts left the room sometime in 2013, albeit coming back for an occasional visit to slum with old friends.

I went to high school with their previous CFO. I can tell you that he was a pretty smart guy among a school of very smart guys. While I was proud of my standardized test scores and they opened up doors, they were absolutely mediocre within the context of the entire graduating class.

From the date he left Goldman Sachs in January 2013, those shares have trailed the S&P 500 by 10%.

You might also be wondering about the Federal Reserve and the smaller subset of its members comprising the FOMC.

When an interest rate increase was announced in December 2016, there were more than subtle hints that 2016 would herald a series of small interest rate increases.

Why would anyone do that?

Clearly, the smartest guys in the room had to believe that the economy was showing signs of growth in the year ahead that would warrant those increases. Mere mortals may not have seen those signs nor had the confidence to proceed and effect policy change.

In the meantime. 2016 has had nothing but mixed signals coming from the economy and even more muddled signals coming from individual members of the FOMC.

As individuals it may be difficult to lay aside some of the biases that pepper interpretation of data, but once in the room and at the table, the smartest should be able to set aside subjectivity.

So it may be even more disappointing that as last Friday’s GDP data was released, there wasn’t much in the way of news to suggest that the economy was warranting even consideration of an interest rate increase, much less an actual increase.

On the day before the GDP was released, the betting was that there was nearly a 50% chance of seeing an interest rate hike in by December 2016.

Now, even with lots more data to come over the course of the next 5 months, that certainty is sure to decrease, just as market volatility and uncertainty decreases in tandem.

What may be clear is that the designation of being the “smartest in the room,” may be no different from what we see in most every stock chart.

Prices wax and wane and perhaps so does the ability to live up to the “smartest” designation.

Or maybe the smartest guy had also left the room, just as may have been the case at Goldman Sachs.

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

As I look around at all of the issues of the day and the sort of things that can and have moved the stock market lately, Sinclair Broadcasting (SBGI), which reports earnings this week, doesn’t share too many of the risks faced by so many.

Unless of course you put lots of faith into charts, in which case everything has been telling you to sell, sell, sell.

Whether its the Bollinger Band, the MACD Signal or the 50 and 200 day moving averages, I think that the proverbial horse has left the gait and shares happen to be at a price that has served me well in the past.

Sinclair Broadcasting, even as we think less and less of terrestrial broadcasting is a growing behemoth, that like its print brethren is probably not going to really be disappearing anytime soon.

Unlike most earnings related trades, I don’t think that I’m interested in pursuing this one through the sale of puts. There isn’t enough liquidity and as a result the bid- ask spreads are just too great to be able to reliably roll these over to avoid assignment.

In addition, sometime in the September 2016 option cycle there is an ex-dividend date, so I would be inclined to either do a buy/write before earnings with a September 2016 expiration or, if concerned about earnings, wait until after their announcement.

In that case, if shares do sink lower, I would then consider selling out of the money current month puts and would take share assignment, if necessary, rather than attempting to roll the puts over. Then, if possible, I would attempt to sell calls on the newly assigned shares in the hopes of securing the dividend, the option premium and perhaps some capital gains on the shares, as well.

PayPal (PYPL) on the other hand, does face some of the challenges that many others do. Currency exchange rates and consumer lethargy are in the equation and despite slightly increased guidance, shares didn’t too terribly well after recently reporting earnings.

Unlike Sinclair Broadcasting, though, PayPal options have nice liquidity and offer extended weekly expirations.

With no dividend to complicate the decision, this is a position that could easily lend itself to consideration of the sale of put options. At its current price, I could envision PayPal as being a potential opportunity for serial rollover or serial sale of puts, even as the share price may increase and existing short put positions expire.

Hewlett Packard (HPQ) seems about as unexciting as anything, except for perhaps Yahoo (YHOO). Sometimes the mighty fall and sometimes their offspring get far more attention than the staid parent that seems to be going nowhere.

I rolled over some Hewlett Packard options last week and have watched as the Hewlett Packard Enterprise (HPE) spin off has continued to perform very well.

I lost those shares to assignment, but their combination, during their respective holding periods had been very good and I think that Hewlett Packard, which reports earnings near the end of the August 2016 has potential to generate some respectable returns, as well.

While my initial interest would be in the sale of weekly call options, if in a position to later consider rolling over, I would keep my eye on the upcoming earnings and then the ex-dividend date a few weeks later.

In so doing, Hewlett Packard could easily become a longer term holding and ideally one that could generate some additional periodic income by virtue of the sale of call options along the way.

Finally. MetLife (MET) is ex-dividend this week and the thesis that it stands to benefit in the early stages of a rising interest rate environment has been waiting a long time for that environment to manifest itself.

Besides that problem, shares are at a near term high having recovered from a nearly 11% one day drop after the “Brexit” vote and Janus’ Bill Gross opining that insurers, banks and pension funds were “slowly going bankrupt.”

I don’t particularly like to go after stocks after that kind of a recovery, but I think that there may be more ahead. Of course, the other problem is that the day before the ex-dividend date, MetLife will report earnings, so to get this dividend you may really have to earn your money.

The option market is expecting only a 3.7% move in either direction, so the option premiums are not that bloated as earnings do approach, but there shouldn’t be too much reason to suspect that MetLife will take a different course from others in the financial sector that have already reported.

Since there is an ex-dividend date, rather than selling puts to take advantage of an earnings related opportunity, I would execute a buy/write using an at the money strike weekly or extended weekly or a slightly out of the money August 2016 expiration date.

In any of those cases an early assignment in the event of an earnings related price surge would result in a very nice 3 day ROI, even if ceding the dividend to the option buyer.

I like those kind of scenarios, especially if there some other identifiable target to re-invest the proceeds of the early assignment

Traditional Stocks: Hewlett Packard

Momentum Stocks: PayPal

Double-Dip Dividend: MetLife (8/4 $0.40)

Premiums Enhanced by Earnings: Sinclair Broadcasting (8/3 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.

Feb202016

Weekend Update – February 21, 2016

Weekend Update Comment

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

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

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

Sometimes you just have to swallow a bitter pill.

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

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

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

That is one big bitter pill.

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

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

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

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

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

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

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

Bad medicine, for sure to stock investors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks:  General Motors

Momentum Stocks: none

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

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

 

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

Feb142016

Weekend Update – February 14, 2016

Weekend Update Comment

It’s not only campaigns that are going negative.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s not a great selling point.

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

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

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

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

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

T-Mobile (TMUS) reports earnings this week.

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

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

The second comes from the option market.

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: General Electric, Sinclair Broadcasting, Weyerhauser

Momentum Stocks: Best Buy

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

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

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

Sep262015

Weekend Update – September 27, 2015

Weekend Update Comment

Subscribers to Option to Profit received preliminary notification of this week’s stock selections on Friday, September 25th, 8:00 AM EDT and updated at 10:20 AM. The full article was distributed on Saturday, at 11:25 AM)

I doubt that Johnny Cash was thinking about that thin line that distinguishes a market in correction from one that is not.

jhgty

For him, walking the line” was probably a reference to maintaining the correct behavior so that he could ensure holding onto something of great personal value.

Sometimes that line is as clear as the difference between black and white and other times the difference can be fairly arbitrary.

Lately our markets have been walking a line, not necessarily borne out of a clear distinction between right and wrong, but rather dancing around the definition of exactly what constitutes a market correction, going in and out without much regard.

The back and forth dance has, to some degree, been in response to mixed messages coming from the FOMC that have left the impression of a divergence between words and actions.

Regardless, what is at stake can hold some real tangible value, despite a stock portfolio not being known for its ability to keep you warm at night. Indirectly, however, the more healthy that portfolio the less you have to think about cranking up the thermostat on those cold and lonely nights.

It had been a long, long time since being challenged by that arbitrary 10% definition, but ever since having crossed that line a month ago there’s been lots of indecision about which direction we were heading.

This week was another good example of that, just as the final day of the week was its own good example of the back and forth that has characterized markets.

Depending on your perspective our recent indecision about which side of the line we want to be on is either creating support for a launching pad higher or future resistance to that move higher.

When you think about the quote attributed to Jim Rogers, “I have never met a rich technician,” you can understand, regardless of how ludicrous that may be, just how true it may also be.

While flipping a coin may have predictable odds in the long term, another saying has some real merit when considering the difficulty in trying to interpret charts and chart patterns,

That is “the market can stay irrational far longer than you can stay liquid.” Just a few wrong bets in succession on the direction can have devastating effects.

The single positive from the past 10 days of trading, however, is that the market has started behaving in a rational manner. It finally demonstrated that it understood the true meaning of a potential interest rate hike and then it reacted as a sane person might when their rational expectation was dashed.

Part of the indecision that we’ve been displaying has to be related to what has seemed as a lot of muddled messages coming from the FOMC and from Federal Reserve Governors. One minute there are hawkish sentiments being expressed, yet it’s the doves that seem to be still holding court, leading onlookers to wonder whether the FOMC is capable of making the decision that many believe is increasingly overdue.

In a week where there was little economic news we were all focused on personalities, instead and still stewing over the previous week’s unexpected turn of events.

It was a week when Pope Francis took center stage, then Chinese President Xi trying to cozy up to American business leaders before his less welcoming White House meeting, and then there was finally John Boehner.

The news of John Boehner’s early departure may be the most significant of all news for the week as it probably reduces the chance of another government shutdown and associated headaches for all.

It also marked something rare in Washington politics; a promise kept.

That promise of strict term limits was included in the “Contract with America” and John Boehner was a member of that incoming freshman Congressional Class of 1995 running on that platform, who has now indicated that he will be keeping that promise after only 11 terms in office.

None of that mattered for markets, but what did matter was Janet Yellen’s comments after Thursday’s market close when she said that a rate hike was likely this year and that overseas events were not likely to influence US policy.

That was something that had a semblance of a definitive nature to it and was to the market’s liking, particularly as the coming week may supply new economic information to justify the interest rate hawks gaining control.

Friday’s revised GDP data indicating a 3.9% growth rate for the year is a start, as the coming week also bring Jobless Claims, the Employment Situation Report and lots of Federal Reserve officials making speeches, including more from Janet Yellen, who had been reclusive for a while prior to the September meeting and Vice Chair Stanley Fischer.

As a prelude to the next earnings season that begins in just 2 weeks, the stage could be set for an FOMC affirmation that the economy is growing sufficiently to begin thinking about inflation for the first time in a long time.

After being on the other side of the inflation line for a long time and seeing a lost generation in Japan, it will feel good to cross over even as old codgers still dread the notion.

Both sides of the line can be the right side, but not at the same time. Now is the time to get on the right side and let rising interest rates reflect a market poised to move higher, just as low interest rates subsidized the market for the past 6 years. However, as someone who likes to sell options and take advantage of this increased volatility, I welcome continued trading in large bursts of movement up and down, as long as that line is adhered to.

Since the mean can always be re-calculated based on where you want to start your observations, this reversion to the new mean, that just happens to be 10% below the peaks of the summer, can be a great neighborhood to dance around.

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

Last week I was a little busier than has been the usual case of late with regard to opening new positions. Following the sharp sell offs to end the previous week I had a reasonably good feeling about the upcoming week, but now feel fortunate to have emerged without any damage.

I don’t feel the same level of optimism as the new week is set to begin, but there really is no reason to have much conviction one way or another, although there appears to be a more hawkish tone in the air as Janet Yellen is attempting to give the impression that actions will be aligned with words.

With the good fortune of getting some assignments as the week came to its close and having some cash in hand, I would like to build on those cash reserves but still find lots of temptations that seek to separate me from the cash.

The temptations aren’t just the greatly diminished prices, but also the enhanced premiums that accompany the uncertainty that’s characterizing the market.

That uncertainty is still low by most standards other than for the past couple of years, but taking individual stocks that are either hovering around correction or even bear market declines and adding relatively high premiums, especially if a dividend is also involved, is a difficult combination to walk away from.

The stocks going ex-dividend in the upcoming week that may warrant some attention are EMC Corporation (EMC) and Cisco (CSCO).

I own shares of both and both have recently been disappointing, Cisco, after its most recent earnings report looked as if it was surely going to be assigned away from me, but as so many others got caught up in the sudden downdraft and has fallen 14% since earnings, without any particularly bad news. EMC for its part has dropped nearly 13% in that same time period.

As is also so frequently the case as option premiums are rising, those going ex-dividend may become even more attractive as an increasing portion of the share’s price drop due to the dividend gets subsidized by the option premium.

That is the case for both Cisco and EMC. In the case of EMC, when the ex-dividend is early in the week you could even be excused for writing an in the money call with the hope that the newly purchased shares get assigned, as you could still potentially derive a 1% ROI on such a trade, yet for only a single day of holding.

Cisco, which goes ex-dividend later in the week may be a situation where it is warranted to sell an expanded weekly option for the following week that is also in the money by greater than the amount of the dividend, again in an effort to prompt an early assignment.

Doing so trades off the dividend for additional premium and fewer days of holding so that the cash may potentially be recycled into other income generating positions.

On such position is Comcast (CMCSA) which is ex-dividend the following Monday and if assigned early would have to be done so at the conclusion of this week.

While the entire media landscape in undergoing rapid change and while Comcast has positioned itself as best as it can to withstand the quantum changes, a trade this week is nothing more than an attempt to exploit the shares for the income that it may be able to produce and isn’t a vote of confidence in its strategic initiatives and certainly not of its services.

The intention with Comcast is considering the sale of an in the money October 9 or October 16, 2015 call and as with Cisco or EMC, consider forgoing the dividend.

However, for any of those three dividend related trades, I believe that their prices alone are attractive enough and their option premiums enhanced enough, that even if not assigned early, they are in good position to be candidates for serial sale of call options or even repurchases, if assigned.

As long as considering a Comcast purchase, one of my favorites in the sector is Sinclair Broadcasting (SBGI). I currently own shares and most often consider initiating a new position as an ex-dividend date is approaching.

That won’t be for a while, however, the second criteria that I look at is where its price is relative to its historical trading range and it is currently below the average of my seven previous purchases in the past 16 months.

While little known, it is a major player in the ancient area of terrestrial television broadcasting and has significant family ownership. While owners of Cablevision (CVC) can argue the merits or liabilities of a closely held public company, the only real risk is that of a proposal to take the company private as a result of shares having sunk to ridiculously low levels.

I don’t see that on the horizon, although the old set of rabbit ears may be to blame for any fuzzy forecasting. Instead of relying on high technology and still being available the old fashioned way for free viewing, Sinclair Broadcasting has simply been amassing outlets all over the county and making money the old fashioned way.

As I had done with my current lot of shares, I sold some slightly longer term call options, as Sinclair offers only the monthly variety. Since it reports earnings very early in November and will likely go ex-dividend late that month, I would consider selling out of the money calls, perhaps using the December 2015 options in an effort to capture the dividend, the option premium and some capital gains on shares.

While religious and political luminaries were getting most of the attention this past week, it’s hard to overlook what has unfolded before our eyes at Volkswagen (VLKAY). Regulatory agencies and the courts may be of the belief that you can’t spell “Fahrvergnügen,” Volkswagen’s onetime advertising slogan buzzword, without “Revenge.” Unfortunately, for those owning shares in the major auto manufacturer’s, such as General Motors (GM), last week’s news painted with a very broad brush.

General Motors hasn’t been immune to its own bad news and you do have to wonder if society places greater onus and personal responsibility on the slow deaths that may be promoted by Volkswagen’s falsified diesel emissions testing than by the instantaneous deaths caused by faulty lock mechanisms.

For its part, General Motors appears to really be bargain priced and will likely escape the continued plastering by that broad brush. With an exceptional option premium this week, plumped up by the release of some sales data and a global conference call, GM’s biggest worry after having resolved some significant legal issues will continue to be currency exchange and potential weakness in the Chinese market.

With earnings due to be reported on October 21st, if considering a purchase of General Motors shares, I would think about a weekly or expanded weekly option sale, or simply bypassing the events and going straight to December, in an effort to also collect the generous dividend and possibly some capital gains while having some additional time to recover from any bad news at earnings.

MetLife (MET) is a stock that is beautifully reflective of its dependency on interest rates. As rates were moving higher and the crowd believed that would go even higher, MetLife followed suit.

Of course, the same happened when those interest rate expectations weren’t met.

Now, however, it appears that those rates will be getting a boost sooner, rather than later, as the FOMC seems to be publicly acknowledging its interests in a broad range of matters, including global events and perhaps even stock market events.

With a recently announced share buyback, those shares are now very attractively priced, even after Friday’s nearly 2% gain.

With earnings expected at the end of the month, I would consider the purchase of shares coupled with the sale of some out of the money calls, hoping to capitalize on both capital gains and bigger than usual option premiums. In the event that shares aren’t assigned prior to earnings, I would consider then selling a November 20 call in an effort to bypass earnings risk and perhaps also capture the next dividend.

Finally, I’ve been anxious to once again own eBay (EBAY) and have waited patiently for its price to decline to a more appealing level. While most acknowledge that eBay gave away its growth prospects when it completed the PayPal (PYPL) spin-off, it has actually out-performed the latter since that spin-off, despite being down  nearly 12%.

While eBay isn’t expected to be a very exciting stock performer, it hadn’t been one for years, yet was still a very attractive covered option trading vehicle, as it’s share price was punctuated by large moves, usually earnings related. Those moves gave option buyers a reason to demand and a reason for sellers to acquiesce.

That hasn’t changed and the volatility induced premiums are as healthy as they have been in years. As that volatility rises in the stock and in the overall market, there’s more and more benefit to be gained from selling in the money options both for enhanced premium and for downside protection.

It would be good to welcome eBay back into my portfolio. Even if it won’t keep me warm, I could likely buy someone else’s flea bitten blanket at a great price, using its wonderful services.

 

Traditional Stocks:  eBay, General Motors, MetLife, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Comcast (10/5 $0.25), Cisco (10/1 $0.21), EMC Corp (9/29 $0.12)

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.

Aug212015

Weekend Update – August 23, 2015

Weekend Update Comment

It wasn’t too long ago that China did what it continues to believe that it does best.

It dictated and restricted behavior.

You really can’t blame them, as for the past 67 years the government has done a very good job of controlling everything within its borders and rarely had to give up much in return.

This time it believed that it could control natural market forces with edicts and with the imposition of a very market un-natural prohibition against selling shares in a large number of stocks.

In the immediate aftermath of that decision nearly 2 months ago, the Shanghai Index had actually fared quite well, especially when you consider that in the month prior that index had taken a free fall and dropped 30% over the course of 27 days.

A subsequent 21% rebound over 15 days after the introduction of new “rules” to inactivate gravitational pull, likely re-inforced the belief that the government was omnipotent and emboldened it as it went forth with a series of rapid and significant currency devaluations, even while sending confusing signals when it moved in to support its currency.

I’ve often wondered about people who engage in risky behaviors, such as free fall jumping. What goes on in their mind, besides the obvious thrill, that tells them they can battle nature and natural laws and be on the winning side?

As with lots of things in life, we have the tendency to project in a very optimistic way. A single victory against all odds suddenly becomes the expected outcome in the future, as if nature and its forces had never heard of the expression “fool me once, shame on me….”

Given China’s track record in getting what it wants they can’t be blamed for believing that they are bigger than the laws that govern markets.

When you believe that you are right or invincible, you don’t really think about such pesky matters as consistency and the likelihood that things will eventually catch up with you.

While it may not be unusual to place some restrictions on trading when things are looking dire, the breadth of the Chinese stock trading restrictions was really broad. The suggestion that those responsible for rampant speculation and “malicious” short selling might suffer anirreversible form of punishment simply sought to ensure that any remaining miscreants severed their alliance with their normal behavior.

But when you’re on a streak and no one questions you, what reason is there to not continue in the same path that got you there? It’s just like not selling your stock positions and pocketing the gains.

Since those restrictions were imposed the Shanghai Index has actually gone 1% higher, which is considerably better than our own S&P 500 which has declined 5% after today’s free fall.

So clearly erecting a dam, even if on the wrong side of the natural flow, has helped and the score is Chinese Government 1, Natural Forces 0.

Except of course if you drill down to the past few days and see a drop of about 13%, while the S&P 500 has gone down 6%.

When the dam breaks, it’s not just the baby in the bath water that’s going to get wet, but more on that, later. That downdraft that we felt on our shores blew in from China as we got sucked in by the vacuum created from their free fall.

As with other instances of trying to do battle with nature there may be the appearance of a victory if you have a very, very short timeframe, but at some point the dam is going to burst and only time can really get things back under control enough to allow an opportunity to rebuild.

This past week was the worst in over 4 years as the S&P 500 fell 5.8%. At this point people are looking at individual stocks and are no longer marveling about how many are in correction territory, but rather how many are approaching or are in bear territory.

I haven’t kept track, but 2015 has been a year in which it seems that the most uttered phrase has been “and the markets have now given up all of their gains for the year.”

While I don’t spend too much time staring at charts and thinking about technical factors, you would have had a very difficult time escaping the barrage of comments about the market having dipped below its 200 Day Moving Average.

The level that I had been keeping my eye on as support was the 2045 level on the S&P 500 and that was breached in the final hour of trading on Thursday, leaving the 2000 level the next likely stop.

That too was left behind in the dust, as is the usual case when in free fall.

As mentioned earlier in the month, those technicals were showing a series of lower highs and higher lows, which is often interpreted as meaning that a break-out is looming, but gives no clue as to the direction.

Now we know the direction, not that it helps any after the fact.

While the DJIA ended the week down a bit more than 10% off from its all time highs, allowing this to now be called a “correction,” the broader S&p 500 is only 7.8% lower. While many elected to sell on their way out in the final hour of the week, I wasn’t, but don’t expect to be very actively buying next week, without some sign of a functioning parachute or at least some very soft land at the bottom.

Buying is something that I will probably leave to those people who are more daring than I tend to be.

However, even they seem to have been a little more careful as this most recent sell-off hasn’t shown much in the way of enticing dare devils to buy on the substantial dips.

Even people prone to enjoying the thrill of a nice free fall are exercising some abundance of caution. While I prefer not to join them on the way down, I don’t mind keeping their company for now.

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

I succumbed a little to the sell off late in the week on Thursday and purchased some shares of Bank of America (NYSE:BAC) in the final hour, right before another leg downward in a market that at that point was already down nearly 300 points.

That simply was a lesson in the issue that faces us all when prices seem to be so irrationally low. Distinguishing between a value priced stock and one that is there to simply suck money out of your pocket isn’t terribly easy to do.

As the sell off continued the following day to bring the August 2015 option cycle to its end the financial sector continued to be hit very hard as interest rates continued their decline.

It wasn’t very long ago that the 10 Year Treasury was ready to hit 2.5% and many were looking at that as being the proverbial “hand writing on the wall,” but in the past month those rates have fallen more than 40% and suddenly that wall is as clean as that baby that is continually mentioned as having been thrown out with the bath water, which coincidentally may be the second most uttered phrase of late.

After committing some money to Bank of America, I’m actually considering adding more financial sector positions in the expectation that the decline in interest rates will be coming to an end very soon as there’s some reason to believe that the FOMC’s dependence on data may be lip service.

Generally, the association between interest rates and the performance of stocks in the financial sector is reasonably straight forward. With some limitations, an increasing interest rate environment increases the margins that such companies can achieve when they put their own money to work.

MetLife (NYSE:MET) is a good example of that relationship and its share price has certainly followed interest rates lower in the past few weeks, just as it dutifully followed those rates higher.

The decline in its shares has been swift and has finally brought them back to the mid-point of the range of the past dozen purchases. While that decline has been swift, the range has been fairly consistent and as the lower end of that range is approached there’s reason to consider braving some of the prevailing winds.

With the swiftness of the decline and with the broader market exhibiting volatility, the option premiums now associated with MetLife are recapturing some of the life that they had earlier in this year and all throughout 2014.

I often like to consider adding shares of MetLife right before an ex-dividend date, but I find the current stock price level to be compelling reason enough to consider a position and perhaps consider a longer term option contract to ride out any storm that may continue to be ahead.

Blackstone (NYSE:BX) hasn’t exactly followed that general rule, but lately it has fallen back in line with that very general rule, as it has plunged in share price since its earnings report and news of some insider selling.

As an example of how easy it has been to be too early in expressing optimism, I thought that Blackstone might be ready for a purchase just 2 weeks ago, but since then it has fallen 12%, although having had nothing but positive analyst comments directed toward it during those weeks. It, too, seems to have been caught in a significant downdraft and continued uncertainty in its near term fortunes are reflected in the very rich option premiums it’s now offering.

My major concern with Blackstone at the moment is whether its dividend, now at an 8.4% yield, can be sustained.

At a time when uncertainty is the prevailing mood, there’s some comfort that could come from having dividends accrue, as long as those dividends are safe.

While it’s dividend isn’t huge, at 2.5% and very safe, Sinclair Broadcasting (NASDAQ:SBGI) again looks inviting as it followed other media companies lower this week and is now at a very appealing part of its trading range.

They have no worries about exchange rates, the Chinese economy or any of those “stories du jour” that have everyone’s attention.

Having reached an agreement with DISH Network earlier in the week to allow retransmission of its signal it saw shares plummet the following day.

Sinclair Broadcasting is ubiquitous around the nation but not exactly a household name, even in its home turf in the Mid-Atlantic. It offers only monthly options and has generally been a longer holding for me, having owned shares on six occasions in the past 15 months.

Lexmark (NYSE:LXK) was one of the early and very pronounced casualties of this most recent earnings season and it has shown no sign of recovery. The market didn’t even cheer as Lexmark announced workforce reductions.

What Lexmark has done since earnings hasn’t been encouraging as its total decline has been in excess of 30%, with a substantial portion of that coming after the initial wave of selling upon earnings being released.

Lexmark also only offers monthly options and it has a dividend yield that’s both enticing and unnerving. The good news is that expected earnings for the next quarter are sufficient to cover the dividend, but there has to be some concern going forward, as Lexmark has found itself in the same situation as its one time parent IBM (NYSE:IBM) having pivoted from its core business and perhaps needing to do so again.

With virtually no exposure to China you might have thought that Deere (NYSE:DE) would have had somewhat of an easier time of things as reporting its earnings for the past quarter.

If so, you would have been wrong, but getting it right hasn’t been the norm of late, regardless of what company is being considered.

The drop seen in Deere shares definitely came as a surprise to the options markets and to most everyone else as they became yet another to beat on earnings, but to miss on revenues.

As is the general theme, as volatility is climbing, at nearly its highest level in 3 years, the premiums are welcoming greater risk taking, even as they provide some cushion to risk.

Following its loss on Friday, even Starbucks (NASDAQ:SBUX) is now among those in correction, having sustained that decline over the past 2 weeks. With some significant exposure in China it may be understandable why Starbucks was a full participant in the market’s weakness.

Like many other stocks, the sudden decline in the context of a market decline that has led to a surge in volatility, option premiums are beginning to look better and better.

As volatility increases, which itself is a reflection of increasing risk, there is the seeming paradox of more of that risk being mollified through the sale of in the money options. The cushion provided by those in the money options increases as the volatility increases, so that the relative risk is reduced more than an upward moving market.

Starbucks, after a prolonged period of very mediocre option premiums is now beginning to show some of the reason why option sellers prefer high volatility. It’s not only for the increased premium, but also for the premium on that premium which allows greater reward even when willing to see shares assigned at a loss.

As an example, at Starbuck’s closing price of $52.84, the weekly $52 option sale would have delivered a premium of $1.64, which would net $0.80, a 1.5% yield, if shares were assigned, even if those shares fell 1.6%.

Those kind of risk and reward end points on otherwise low risk stocks haven’t been seen in a few years and is very exciting for those who do sell options on a regular basis.

Finally, not many companies have had their obituaries prepared for release as frequently as GameStop (NYSE:GME) has had to endure for many years.

Somehow, though, even as we think that the model for gaming distribution is changing there exists a strong core of those still yearning for physicality, even if in a virtual world.

GameStop reports earnings this week and it is no stranger to strong moves. The option market, however is implying only an 8.8% move, which seems substantial, but as this most recent earnings season will attest, may be under-stated.

For those bold enough to consider the sale of puts before earnings, a 1% ROI can be achieved if shares fall less than 12.1%.

As with a number of other earnings related trades over the past few months, I’m not so bold as to consider the trade in advance of earnings, but might consider selling puts after earnings in the event of a large move downward.

Lately, that has been a better formula for balancing reward and risk, although it may result in some lost opportunities in the event that shares don’t plummet beyond the strike prices implied by the option market. That, however, can be a small price to pay when the moves have so frequently been out-sized in their magnitude and offering a reward that ends up being dwarfed by the risk.

Considering that GameStop has fallen only 4.6% from its highs, it may be under additional pressure in the event of even a mild disappointment or less than optimistic guidance.

While it may be premature to begin the flow of tears and recount the good memories of GameStop and a youth wasted, I would be cautious about discounting the concerns entirely as far as the market’s reaction may be concerned.

Traditional Stock: Blackstone, Deere, General Electric, MetLife, Starbucks

Momentum Stock: none

Double-Dip Dividend: Lexmark (8/26 $0.36), Sinclair Broadcasting (8/28 $0.16)

Premiums Enhanced by Earnings: GameStop (8/27 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.

Aug82015

Weekend Update – August 9, 2015

Weekend Update Comment

In an age of rapidly advancing technology, where even Moore’s Law seems inadequate to keep up with the pace of advances, I wonder how many kids are using the same technology that I used when younger.

It went by many names, but the paper “fortune teller” was as good a tool to predict what was going to happen as anything else way back then.

Or now.

It told your fortune, but for the most part the fortunes were binary in nature. It was either good news that awaited you later in life or it was bad news.

I’m not certain that anything has actually improved on that technology in the succeeding years. While you may be justified in questioning the validity of the “fortune teller,” no one really got paid to get it right, so you could excuse its occasional bad forecasting or imperfect vision. You were certainly the only one to blame if you took the results too seriously and was faced with a reality differing from the prediction.

The last I checked, however, opinions relating to the future movements of the stock market are usually compensated. Those compensations tend to be very generous as befitting the rewards that may ensue to those who predicate their actions on the correct foretelling of the fortunes of stocks. However, since it’s other people’s money that’s being put at risk, the compensations don’t really reflect the potential liability of getting it all wrong.

Who would have predicted the concurrent declines in Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) that so suddenly placed them into correction status? My guess is that with a standard paper fortune teller the likelihood of predicting the coincident declines in Disney and Apple placing them into correction status would have been 12.5% or higher.

Who among the paid professionals could have boasted of that kind of predictive capability even with the most awesome computing power behind them?

If you look at the market, there really is nothing other than bad news. 200 Day Moving Averages violated; just shy of half of the DJIA components in correction; 7 consecutive losing sessions and numerous internal metrics pointing at declining confidence in the market’s ability to move forward.

While this past Friday’s Employment Situation Report provided data that was in line with expectations, wages are stagnant If you look at the economy, it doesn’t really seem as if there’s the sort of news that would drive an interest rate decision that is emphatically said to be a data driven process.

Yet, who would have predicted any of those as the S&P 500 was only 3% away from its all time highs?

I mean besides the paper fortune teller?

Seemingly paradoxical, even while so many stocks are in personal correction, the Volatility Index, which many look at as a reflection of uncertainty, is down 40% from its 2015 high.

As a result option premiums have been extraordinarily low, which in turn has made them very poor predictors of price movements of late, as the implied move is based upon option premium levels.

Nowhere is that more obvious than looking at how poorly the options market has been able to predict the range of price movements during this past earnings season.

Just about the only thing that could have reasonably been predicted is that this earnings season who be characterized by the acronym “BEMR.”

“Beat on earnings, missed on revenues.”

While a tepid economy and currency exchange have made even conservative revenue projections difficult to meet, the spending of other people’s money to repurchase company shares has done exactly what every CEO expected to be the case. Reductions in outstanding shares have boosted EPS and made those CEOs look great.

Even a highly p[aid stock analyst good have predicted that one.

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

Not too surprisingly after so many price declines over the past few weeks, so many different stocks look like bargains. Unfortunately, there’s probably no one who has been putting money at risk for a while who hasn’t been lured in by what seemed to be hard to resist prices.

It’s much easier to learn the meaning of “value trap” by reading about it, rather than getting caught in one.

One thing that is apparent is that there hasn’t been a recent rush by those brave enough to “buy on the dip.” They may simply be trading off bravery for intelligence in order to be able to see yet another day.

With my cash reserves at their lowest point in years, I would very much like to see some positions get assigned, but that wish would only be of value if I could exercise some restraint with the cash in hand.

One stock suffering and now officially in correction is Blackstone (NYSE:BX). It’s descent began with its most recent earnings report. The reality of those earnings and the predictions for those earnings were far apart and not in a good way.

CEO Schwarzman’s spin on performance didn’t seem to appease investors, although it did set the tone for such reports as “despite quarterly revenues and EPS that were each 20% below consensus. That consensus revenue projection was already one that was anticipating significantly reduced levels.

News of the Blackstone CFO selling approximately 9% of his shares was characterized as “unloading” and may have added to the nervousness surrounding the future path of shares.

But what makes Blackstone appealing is that it has no debt on its own balance sheet and its assets under management continue to grow. Even as the real estate market may present some challenges for existing Blackstone properties, the company is opportunistic and in a position to take advantage of other’s misery.

Shares command an attractive option premium and the dividend yield is spectacular. However, I wouldn’t necessarily count on it being maintained at that level, as a look at Blackstone’s dividend payment history shows that it is a moving target and generally is reduced as share price moves significantly lower. The good news, however, is that shares generally perform well following a dividend decrease.

Joining Blackstone in its recent misery is Bed Bath and Beyond (NASDAQ:BBBY). While it has been in decline through 2015, its most recent leg of that decline began with its earnings report in June.

That report, however, if delivered along with the most recent reports beginning a month ago, may have been met very differently. Bed Bath and Beyond missed its EPS by 1% and met consensus expectations for revenue.

Given, however, that Bed Bath and Beyond has been an active participant in share buybacks, there may have been some disappointment that EPS wasn’t better.

However, with more of its authorized cash to use on share buy backs, Bed Bath and Beyond has been fairly respectful in the way it uses other people’s money and has been more prone to buying shares when the stock price is depressed, in contrast to some others who are less discriminating. As shares are now right near a support level and with an option premium recognizing some of the uncertainty, these shares may represent the kind of value that one of its ubiquitous 20% of coupons offers.

The plummet is Disney shares this week following earnings is still somewhat mind boggling, although short term memory lapses may account for that, as shares have had some substantial percentage declines over the past few years.

Disney’s decline came amidst pervasive weakness among cable and content providers as there is a sudden realization that their world is changing. Words such as “skinny” and “unbundling” threaten revenues for Disney and others, even as revenues at theme parks and movie studios may be bright spots, just as for Comcast (NASDAQ:CMCSA).

As with so many other stocks as the bell gets set to ring on Monday morning, the prevailing question will focus on value and relative value. Disney’s ascent beyond the $100 level was fairly precipitous, so there isn’t a very strong level of support below its current price, despite this week’s sharp decline. That may provide reason to consider the sale of puts rather than a buy/write, if interested in establishing a position. Additionally, a longer term time frame than the one week that I generally prefer may give an opportunity to generate some income with relatively low risk while awaiting a more attractive stock price.

While much of the attention has lately been going to PayPal (NASDAQ:PYPL) and while I am now following that company, it’s still eBay (NASDAQ:EBAY) that has my focus, after a prolonged period of not having owned shares. Once a mainstay of my holdings and a wonderful covered option trade it has become an afterthought, as PayPal is considered to offer better growth prospects. While that may be true, I generally like to see at least 6 months of price history before considering a trade in a new company.

However, as a covered option trader, growth isn’t terribly important to me. What is important is discovering a stock that can have some significant event driven price movements in either direction, but with a tendency to predictably revert to its mean. That creates a situation of attractive option premiums and relatively defined risk.

eBay is now again trading in a narrow range after some of the frenzy associated with its PayPal spin-off, albeit the time frame for that assessment is limited. However, as it has traded in a relatively narrow range following the spin-off, the option premium has been very attractive and I would like to consider shares prior to what may be an unwanted earnings surprise in October.

Sinclair Broadcasting (NASDAQ:SBGI) reported earnings last week beating both EPS and revenue expectations quite handily. However, the market’s initial response was anything but positive, although shares did recover about half of what they lost.

Perhaps shares were caught in the maelstrom that was directed toward cable and content providers as one thing that you can predict is that a very broad brush is commonly used when news is at hand. But as a plebian provider of terrestrial television access, Sinclair Broadcasting isn’t subject to the same kind of pressures and certainly not to the same extent as their higher technology counterparts.

I often like to consider the purchase of shares just before Sinclair Broadcasting goes ex-dividend, which it will do on August 28th. However, with the recent decline, I would consider a purchase now and selling the September 18, 2015 option contract at a strike level that could generate acceptable capital gains in addition to the dividend and option premium, while letting the cable and content providers continue to take the heat.

It seems only appropriate on a week that is focused on an old time paper fortune teller that some consideration be given to International Paper (NYSE:IP) as it goes ex-dividend this week. With its shares down nearly 17% from their 2015 high, the combination of perceived value, very fair option premium and generous dividend may be difficult to pass up at this time, while having passed it up on previous occasions during the past month.

International Paper’s earnings late last month fell in line with others that “BEMR,” but it shares remained largely unchanged since that report and shares appear to have some price support at its current level.

You may have to take my word for it, but Astra Zeneca (NYSE:AZN) is going ex-dividend this week. That information didn’t appear in any of the 3 sources that I typically use and my query to its investor relations department received only an automated out of office response. The company’s site stated that a dividend announcement was going to be made when earnings were announced on July 30th, but a week after earnings the site didn’t reflect any new information. Fortunately,someone at NASDAQ knew what I wanted to know.

Astra Zeneca pays its dividends twice each year, the second of which will be ex-dividend this week and is the smaller of the two distributions, yet still represents a respectable 1.3% payment.

I already own shares and haven’t been disappointed by shares lagging its peers. What I have been disappointed in, however, has been it’s inability to mount any kind of sustained move higher and the inability to sell calls on those shares, particularly as there had been some liquidity issues.

The recent stock split, however, has ameliorated some of those issues and there appears to be some increased options trading volume and smaller bid-ask discrepancies. Until that became the case, I had no interest in adding shares, but am now more willing to do so, also in anticipation of some performance catch-up to its other sector mates.

The promise that seemed to reside with shares of Ali Baba (NYSE:BABA) not so long ago has long since withered along with many other companies whose fortunes are closely tied to the Chinese economy.

Ali Baba reports earnings this week and the option market is predicting only a 6.7% price move. That seems to be a fairly conservative assessment of the potential for exhilaration or the potential for despair. However, a 1% ROI through the sale of a weekly put option is not available at a strike that’s below the bottom of the implied range.

For that reason, I would approach Ali Baba upon earnings in the same manner as with Green Mountain Keurig’s (NASDAQ:GMCR) earnings report. That is to only consider action after earnings are released and if shares drop below the implied lower end of the range. There is something nice about letting others exercise a torrent of emotion and fear and then cautiously wading into the aftermath.

Finally, during an earnings season that has seen some incredible moves, especially to the downside, Cree (NASDAQ:CREE) should feel right at home. It has had a great habit of surprising the options market, which is supposed to be able to predict the range of a stock’s likely price move, on a fairly regular basis.

With its products just about every where that you look you would either expect its revenues and earnings to be booming or you might think that it was in the throes of becoming commoditized.

What Cree used to be able to do was to trade in a very stable manner for prolonged periods after an earnings related plunge and then recover much of what it lost as subsequent earnings were released. That hasn’t been so much the case in the past year and its share price has been in continued decline in 2015, despite a momentary bump when it announced plans to spin-off a division to “unlock its full value.”

The option market is implying a 9.4% move when earnings are announced this coming week. By historical standards that is a low estimation of what Cree shares are capable of doing. While one could potentially achieve a 1% weekly ROI at a strike price nearly 14% below Friday’s closing price, as with Ali Baba, I would wait for the lights to go out on the share’s price before considering the sale of short term put options.

Traditional Stocks: Bed Bath and Beyond, Blackstone, Disney, eBay, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Astra Zeneca (8/12 $0.45), International Paper (8/12 $0.40)

Premiums Enhanced by Earnings: Ali Baba (8/12 AM), Cree (8/11 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.

Jun202015

Weekend Update – June 21, 2015

Weekend Update Comment

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

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

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the challenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to whether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 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.

May312015

Weekend Update – May 31, 2015

Weekend Update Comment

The one thing that’s been pretty clear as this earnings season is winding down is that the market hasn’t been very tolerant unless the bad news was somehow wrapped in a currency exchange story.

It was an earnings season that saw essentially free passes given early on to those reporting decreased top line revenue and providing dour guidance, as long as the bad news was related to a strong US Dollar.

As earnings season progressed, however, it became clear that some companies that could have asked for that free pass were somehow much better able to tolerate the conditions that investors were willing to forgive. That had to raise questions in some minds as to whether there was a little too much leniency as the market’s P/E ratio was beginning to get a little bit ahead of where it historically may have been considered fully priced. Not punishing share price when earnings may warrant doing so can lead to those higher P/E ratios that so often seem to have had a hard time sustaining themselves at such heights.

On the other hand, plunges of 20% or more weren’t uncommon when the disappointment and the pessimistic future outlook couldn’t be easily rationalized away. Sometimes the punishment seemed to be trying to make up for some of those earlier leniences, although if that’s the case, it’s not a very fair resolution.

In other words, this earnings season has been one where bad news was good news, as long as there was a good reason for the bad news. If there was no good reason for the bad news, then the bad news was extra bad news.

This past Friday’s GDP report was bad news. It was the kind of news that would make it difficult to justify increasing interest rates anytime very soon. That. of course, would make it good news.

The market, though, interpreted that as bad news as the week came to its close, while the same news a month ago would have been likely greeted as good news.

Same news, but take your pick on its interpretation.

This past week was one that i couldn’t decide how to interpret anything that was unfolding. Listless pre-open futures trading during the week sometimes failed to portend what was awaiting and so eager to reverse course, at the sound of the opening bell. While I tend to trade less on holiday shortened weeks usually due to lower option premiums, this past week offered me nothing to feel positive about and more than a few reasons to continue to want to wish that i had more in my cash reserve pile.

As the new week is getting ready to start, it’s another with fairly little to excite. Like this past week, perhaps the biggest news will come on the final trading day, as the Employment Situation Report is released.

Another strong showing may only serve to confuse the picture being painted by GDP data, which is now suggesting increased shrinking of our economy.

A weak employment report might corroborate GDP data, but at this point it’s hard to say what the market reaction might be. Whether that would be perceived as good news or bad news is a matter of guesswork.

If the news, however, is really good, then it’s really anyone’s guess as to what would happen, as a decreasing GDP wouldn’t seem to be a logical consequence of strongly expanding employment.

While the FOMC says that it will be data driven and has worked to remove any reference to a relative timeframe, ultimately it’s not about the data, but rather how they chose to interpret it, especially if logic seems to be failing to tie the disparate pieces together.

While markets may change how they interpret the data from day to day, hopefully the FOMC will be a bit more consistent and methodical than the paper fortune teller process markets have been subjected to of late.

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

Kohls (NYSE:KSS) is one of those companies that didn’t have a currency exchange excuse that could be used at earnings time and its shares took a nearly 15% plunge. Best of all, if not having owned shares, in the subsequent 2 weeks its share price has barely moved. That lack of movement can either represent an opportunity that hasn’t disappeared or could be the building of a new support level and invitation to take advantage of that opportunity.

With an upcoming ex-dividend date on Monday of next week, any decision to exercise an option to grab the dividend would have to be made by the close of trading this week. With only monthly options being sold, that could be an attractive outcome if purchasing shares and selling in the money June 2015 calls.

The potential downside is that the dramatic drop in Kohls’ share price still hasn’t returned it to where it launched much higher a few months ago and where the next level of technical support may be. For that reason, while hoping for a quick early assignment and the opportunity to then redeploy the cash, there is also the specter of a longer term holding in the event that shares start migrating lower to its most recent support level.

Mosaic (NYSE:MOS) is ex-dividend this week and represents a company that had a similar plunge nearly 2 years ago, but still has shown no signs of recovery. In its case the price plunge wasn’t related to poor sales or reduced expectations, but rather to the collapse of artificial price supports as the potash cartel was beginning to fall apart.

Mosaic, however, has traded in a fairly narrow range since then and has been an opportune short term purchase when at or below the mid-point of that range.

Those shares are now at that mid-point and the dividend is an additional invitation to entry for me. With its ex-dividend day being Tuesday, it may also be an example of seeking early assignment by selling an in the money weekly call in the hopes of attaining a small, but very quick gain and then redeploying cash into a new position.

I recently had shares of Sinclair Broadcasting (NASDAQ:SBGI) assigned and tried to repurchase them last week in order to capture the dividend, but just couldn’t get the trade executed. However, even with the dividend now out of the picture, I am interested in adding the shares once again.

While so much attention has recently focused on cable and content providers, Sinclair Broadcasting is simply the largest television station operator in the United States. The tightly controlled family operation shows that there is still a future in doing nothing more than transmitting signals the old fashioned way.

While I usually prefer to start new positions with an eye toward a weekly option or during the final week of a monthly option, Sinclair Broadcasting is one of those companies that I don’t mind owning for a longer period of time and don’t get overly concerned if its shares test support levels. I would have preferred to have entered the position last week, but at $30/share I still see some opportunity, but would not chase this if it moved higher as the week begins.

With old tech no longer moribund, people are no longer embarrassed to admit that they own shares of Microsoft (NASDAQ:MSFT). Instead, so many seem to have re-discovered Microsoft before the rest of the world and no longer joke about or disparage its products or strategies. They simply forgot to tell the rest of the world that they were going to be so prescient, but fortunately, it’s never to late to do so.

Microsoft continues to have what has made it a great covered call trade for many years. It still offers an attractive premium and it offers dividend growth. Of course the risk is now greater as shares have appreciated so much over those years. But along with that risk comes an offset that may offer some support. In the belief that passivity or poorly conceived or integrated strategies are no longer the norm it is far easier to invest in shares with confidence, even as the 52 week high is within reach.

While new share heights provide risk there is also the feeling that Microsoft will be in a better position to proactively head into the future and react to marketplace challenges. Even the brief speculation about a buyout of salesforce.com (NYSE:CRM) helped to reinforce the notion that Microsoft may once again be “cool” and have its eyes on a logical strategy to evolve the company.

For the moment it seems as if some of the activist and boardroom drama at DuPont (NYSE:DD) may have subsided, although it’s not too likely that it has ended.

The near term question is whether activists give up their attempts at enhancing value and exit their positions with respectable profits or double down, perhaps with new strategic recommendations.

While the concern about Trian exiting its position may have been responsible for the steep price decline after the shareholder vote last month, it’s not entirely clear that the Trian stake was in any meaningful way responsible for DuPon’t share performance, as they like to credit themselves.

It’s apparently all a matter of interpretation.

In fact, from the time the Trian stake was first disclosed nearly 2 years ago, DuPont has only marginally out-performed the S&P 500. However, from the beginning of the market recovery in March 2009 up until the points that Trian’s stake was disclosed, DuPont’s share performance was more than 50% better than that of the S&P 500.

So while the market has clearly shown that they perceive Peltz’s position and strategy to be an important support for DuPont’s share price and they may have already discounted his exit, CEO Kullman’s strategic path may have easier going without activist distractions

Finally, following the release of some clinical trial results of its drug Opdivo in the treatment of lung cancer, shares of Bristol Myers Squibb (NYSE:BMY) fell nearly 7% on Friday. Those shares are still well above the level where they peaked following an earnings related move in October 2014, so there is still some concern that the decline last week may have more to go.

However, the results of those clinical trials actually had quite a few very positive bits of news, including significantly increased survival rates in a sizeable sub-population of patients and markedly lower side effects. On Friday, the market interpreted the results as being very disappointing, but after a few days that interpretation can end up becoming markedly different.

As we all know too well.

Traditional Stocks: Bristol Myers Squibb , DuPont, Microsoft, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Kohls (6/8), Mosaic (6/2)

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.

May92015

Weekend Update – May 10, 2015

Weekend Update Comment

Many years ago people were fascinated by the movie “The Three Faces of Eve.”

It was the story of a woman afflicted with what was known at the time as “Multiple Personality Disorder,” although many incorrectly believed that the story was one characteristic of an individual with schizophrenia.

For her performance of all 3 characters, none of whom was aware of any of the others, Joanne Woodward won an Oscar for “Best Actress.” Yet 30 years later, in a sign of an unjust society, neither Eddie Murphy nor Arsenio Hall received any notice whatsoever from The Academy for each portraying 4 distinct characters.

While there’s still hope that such acting genius may someday be rewarded, there’s very little hope of being able to understand just what face the market will be showing from day to day.

Doug Kass, a well known hedge fund manager is fond of Tweeting that the market has no memory from day to day and that observation, while not seeming to be offering a diagnosis, has it well characterized.

Lack of memory for important information not explained by ordinary forgetfulness is one of the cardinal signs of Dissociative Identity Disorder and this market, however one wishes to characterize it, may have the same affliction as was suffered by Eve. But as long as it keeps reaching new record highs, it too will keep winning awards for its performance.

While some may say that the market is “acting schizophrenic,” they neither know the distinction between that malady and Dissociative Identity Disorder, nor understand the use of adverbs. While volatility may also be a hallmark of the disorder the rapid alternations between market plunges and surges are doing nothing to enhance volatility. In fact, for all of the uncertainty, volatility remains within easy striking distance of its 52 week low and was virtually unchanged last week.

In a week with very little economic news scheduled until this past Friday’s Employment Situation Report and with most key companies having already reported earnings, there was little reason to expect many large moves. However, as has been the case in recent weeks, there hasn’t always been the requirement of an identifiable reason for the market making a large move. What has also been the case is that so often the very next day brought about a reversal of fortune or mis-fortune of the previous day and another subsequent Doug Kass Tweet.

Those Kass market memory Tweets are fairly common and I do believe that he recalls having sent them on many previous occasions. While I offer him no diagnosis based on those Tweets, they do perfectly sum up the market that we’ve come to know.

The problem is that which just don’t know which market will be showing up from day to day and sometimes from hour to hour.

I wonder if Eve had that same problem?

Compounding the inherent uncertainty occurs when an otherwise dependable and reliable source seems to turn on you.

Mid-week we got to see a Janet Yellen face that we had only seen once previously. It was the face that unlike its more commonly visible counter-part, wasn’t the one that sought directly or indirectly to calm and prop up stock markets.

During her tenure, especially during her post-FOMC Statement release press conferences, most of us have come to appreciate the boost of confidence Janet Yellen has supplied markets, as well as having an appreciation for the manner in which she balances pragmatic and social concerns with monetary policy.

But this week instead it was that Yellen character that questions stock market value, almost in the same way as a predecessor pointed a finger at “frothy exuberance.”

While not quite as bad as the racy and wild side of Eve that tried to murder her child, the value questioning side of Janet Yellen sent markets for a tumble. But just as after her 2014 comments about “substantially stretched” valuation metrics in bio-technology companies, the impact may be short lived, as it was this week.

Perhaps some thanks for that should go to the auspiciously timed release of the Employment Situation Report that avoided creating either a “bad news is good news” or “good news is bad news” by delivering numbers that were right in line with expectations.

Of course, when considering how much contra-distinction there has been in recent monthly Employment Situation Reports one might be excused for believing that they too suffer from Dissociative Identity Disorder and it may be injurious to one’s portfolio health to base too many actions on any given month’s data.

This coming week is another very slow one for economic news. While earnings season is now winding down the catalyst or the retardant for the market to get to the next new set of highs may be the slew of national retailers reporting earnings this week.

Some 6 months ago those retailers were among those optimistically talking about how they would benefit from increased consumer spending as a result of lower energy prices.

About that….

Those same retailers may be putting on a different face when reporting this week if those gains haven’t materialized, as there are no indications that the GDP has grown as expected.

To the contrary, actually.

Only one of the major retailers will report before this Wednesday’s Retail Sales Report, but it was the CEO of that company, Terry Lundgren, who was initially among the most optimistic regarding the prospects for Macys (NYSE:M) and who months later made the very astute observation that the energy savings experienced by consumers hadn’t accumulated sufficiently to create the feeling of actually having more discretionary cash to spend.

Sooner or later the projections for significant growth in GDP will have to be written off as just the rants of economists who had surrendered their better judgment to their racy and wild alternate egos and who can’t be blamed for their actions.

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

After the last two weeks, I think, that even after a previous lifetime of toiling away for a paycheck and not really appreciating its significance, I finally understand the meaning of “TGIF.”

The strong recoveries seen in each of the past two Fridays helped to rescue some weeks that were turning out to be fairly dour.

The downside, however, is that when the coming week is about to begin, so many of the stocks that you had been eying for a purchase were up sharply to end the previous week.

There are probably worse problems to have in life, so I won’t dwell too long on that one, but that is where this past Friday’s 267 point gain in the DJIA has us beginning the new week.

Sinclair Broadcasting (NASDAQ:SBGI) has quietly become the largest television station operators in the United States. While seemingly the only topics discussed these days are about streaming signals, satellites and cable there’s still life left in terrestrial television. The family controlled company certainly believes in the future of traditional television broadcasting as over the past several years the company has actively amassed new stations around the country.

Following an initial move higher after it reporting earnings shares gave up some ground and are now about 9% below its recent high from last month, at which time I had my previous shares assigned.

I purchased shares on 5 occasions in 2014 and have been waiting for a chance to do so in 2015. With its recent decline and with this being the final week of a monthly option cycle, I would consider once again adding shares in the hopes of a quick assignment. However, if not assigned, shares are then ex-dividend May 28th and I would consider selling either June or the July 2015 options on those shares.

Mattel (NASDAQ:MAT) has suffered of late.

It literally started 2015 off by being named one of the worst run companies of 2014 on New Years Day. Its shares continued to stumble even after its CEO unexpectedly resigned a few weeks later as the lure of its Barbie was waning in a world of electronic toys more welcomingly embraced by some of its competitors.

More recently some of the negativity that characterized 2015 had abated as the market actually embraced the smaller than expected loss at the most recent earnings report. While some of the gains have been since digested, Mattel may have now seen what the near term bottom looks like.

With earnings now out of the way for a short while and an upcoming ex-dividend date the following week, I am considering adding shares, but bypassing the week remaining on the monthly May 2015 contract and going directly to the June contract and banking on some share gains and not just option premiums and dividends for the effort.

Fastenal (NASDAQ:FAST) is one of those stocks that I always like to own, as it is an assuming kind of company that tends to reflect what is going on in the economy and is relatively immune from currency exchange issues.

Most recently, after having positively reacted to earnings it failed to climb back toward where it had been at the time of its January earnings report. However, it does appear as if it is building a base to make that assault. As with Sinclair Broadcasting and Mattel, Fastenal only offers monthly options, so any potential purchase this week paired with an option sale could look at the May 15, 2015 contracts, effectively making it a weekly contract, or go directly to the June 2015 expirations, especially if believing that there is some capital appreciation in store for shares.

DuPont (NYSE:DD) and Teva Pharmaceuticals (NYSE:TEVA) have both spent a lot of time in the news lately and both are ex-dividend this week.

DuPont is one stock that came to mind when bemoaning the strong gains seen this past Friday, as it was definitely a beneficiary of broad market strength. It continues to be embroiled in a fight with activists which may have profound ramifications with how investors look at and value a company’s intellectual and research pursuits.

The question of how valuable research activities are to a company if they are part of a separate company is one that pits short term and long term outlooks against one another. Although I tend to trade for the short term, and while I believe that Nelson Peltz is generally a positive influence on the companies in which he has taken a significant financial stake, I disagree with the idea of splitting off assets that are at the core of developing intellectual property.

However, as long as the fighting continues, there is opportunity to see shares climb even higher. It is precisely because of the uncertainty that comes along with the ongoing conflict that DuPont is offering an exceptionally high option premium, particularly in a week that it is ex-dividend.

The world of pharmaceutical companies was once so staid. Every self respecting portfolio was required to own shares in a high dividend paying blue chip pharmaceutical company, many of whom have been swallowed up over the years in the process of creating even larger and less responsive behemoths.

From nothingness, generic drug companies and bio-pharmaceutical companies are becoming their own behemoths and are recently at center stage with seemingly daily merger and acquisition activity.

Teva has joined the crowd seeking to grow through acquisition and may be willing to fight for the opportunity to grow. Of course, its target may have some other ideas, including possibly seeking to purchase Teva itself.

Like DuPont, the uncertainty in the air has it offering a very appealing option premium even in a week that shares are ex-dividend. With shares having recently declined by about 10% in the past month, it’s possible that some of the downside risk that may be associated with a fight or a failed conquest attempt has already been discounted.

Zillow (NASDAQ:Z) reports earnings this week having declined about 25% since its last earnings report. Its CEO, a darling of cable business news blamed the prolonged regulatory process encountered during its proposed purchase of its competitor Trulia, for leaving the company “trending a couple quarters behind where we’d like to be.”

But that comment was from last month, so the expectation would be that the market is prepared for whatever may come their way as earnings are reported this week.

That kind of logic is fine until faced with counter-examples, such as SanDisk (NASDAQ:SNDK) which despite warning upon warning, still managed to surprise everyone. Of course, the same could be said for early 2014 when markets seemed to be surprised by how bad weather impacted earnings after having heard nothing but how weather was effecting sales for months.

In this case the option market is implying an 8.1% move for Zillow after earnings are reported. That’s fairly mild after the past 2 weeks of having seen declines on the order of 25% coming from companies that couldn’t place many excuses for its performance at the feet of currency exchange woes.

Finally, it takes a lot for me to consider a new stock and to think about putting it into portfolio rotation. It’s even more difficult to do that with a company that has less than 6 months of public trading behind it.

I recently found my second ever blog article, one from 8 years ago, which was about peer lending re-posted on an aggregator site. At the time, I looked at peer lending as a potential means of diversifying one’s portfolio, especially with the aim of generating income streams.

While the early leader of the concept is still around, it was LendingClub (NYSE:LC) that finally brought it to the equity markets.

Its earnings last week, despite being slightly better than the consensus, did nothing to stem the downward price spiral since the IPO. The stock’s close tracking of the 10 Year Treasury Note broke down in March, but I believe that with the stock approaching its IPO price that concordance with interest rates will soon be re-established.

If that proves to be the case and there is a suggestion that the bond market may now be on the right path in predicting the inevitable rise in rates, the LendingClub and its shares are likely to prosper.

Like an unusual number of stocks presented this week, LendingClub also offers only monthly options. However, without a dividend to consider, I would look at any potential purchase of shares as a short term trade and would sell the May 2015 options, which are offering a very attractive premium as the possibility of further share price declines are being factored in by the options market.

Traditional Stocks: Fastenal, Mattel, Sinclair Broadcasting

Momentum Stocks: LendingClub

Double Dip Dividend: DuPont (5/13), Teva Pharmaceuticals (5/15)

Premiums Enhanced by Earnings: Zillow (5/12 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.

Nov82014

Weekend Update – November 9, 2014

Weekend Update Comment

Pity the poor hedge fund manager.

For the second consecutive year hedge fund managers are, by and large, reportedly falling far short of their objectives and in jeopardy of not generating their performance fees. 

We all know that those mortgages aren’t going to pay themselves, so their choices are clear.

You can close up shop, disown the shortfalls and try to start anew; you can keep at business as usual and have your under-performance weigh you down in the coming year; or you can roll the dice.

In 2013 it may have been easy to excuse lagging the S&P 500 when that index was nearly 30% higher while you were engaging in active management and costly complex hedging strategies. This year, however, as the market is struggling to break a 10% gain, it’s not quite as easy to get a bye on a performance letdown.

The good news, however, is that the 2014 hurdle is not terribly far out of reach. Despite setting new high after new high, thus far the gains haven’t been stupendous and may still be attainable for those hoping to see daylight in 2015.

The question becomes what will desperate people do, especially if using other people’s money knowing that half of all hedge funds have closed in the past 5 years. Further more funds were closed in 2013 and fewer opened in 2014 than at any point since 2010. It has been a fallow pursuit of alpha as passivity has shown itself fecund. Yet, assets under management continue to grow in the active pursuit of that alpha. That alone has to be a powerful motivator for those in the hedge fund business as that 2% management fee can be substantial.

So I think desperation sets in and that may also be what, at least in part, explained the November through December outperformance last year as the dice were rolled. Granted that over the past 60 years those two months have been the relative stars, that hasn’t necessarily been the case in the past 15 years as hedge funds have become a part of the landscape.

Where it has been the case has been in those years that the market has had exceptionally higher returns which usually means that hedge funds were more likely to lag behind and in need of catching up and prone to rolling the dice.

While the hedging strategies are varied, very complex and use numerous instruments, rolling the dice may explain what appears to be a drying up in volume in some option trading. As that desperation displaces the caution inherent in the sale of options motivated buyers are looking at intransigent sellers demanding inordinately high premiums. With the clock ticking away toward the end of the year and reckoning time approaching, the smaller more certain gains or enhancements to return from hedging positions may be giving way to trying to swing for the fences.

The result is an environment in which there appears to be decreased selling activity, which is especially important for those that have already sold option contracts and may be interested in buying them back to close or rollover their positions. In practice, the environment is now one of low bids by buyers, reflecting low volatility but high asking prices by sellers, often resulting in a chasm that can’t be closed.

Over the past few weeks I’ve seen the chasm on may stocks closed only in the final minutes of the week’s trading when it’s painfully obvious that a strike price won’t be reached. Only then, and again, a sign of desperation, do ask prices drop in the hopes of making a sale to exact a penny or two to enhance returns.

So those hedge fund managers may be more likely to be disingenuous in their hedging efforts as they seek to bridge their own chasms over the next few weeks and they could be the root behind a flourish to end the year.

Other than a continuing difficulty in executing persona trades, I hope they do catch up and help to propel the market even higher, but I’m not certain what may await around the corner as January is set to begin.

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

I already own shares of Cypress Semiconductor (CY) and am continually amazed at the gyrations its price sees without really going very far. In return for watching the shares of this provider of ubiquitous components go up and down, you can get an attractive option premium that reflects the volatility, but doesn’t really reflect the reality. In addition, if holding shares long enough, there is a nice dividend to be had, as well. Selling only monthly call options, I may consider the use of a December 2014 option and may even consider going to the $11 strike, rather than the safer $10, borrowing a page from the distressed hedge fund managers.

I had my shares of Intel (INTC) assigned early this week in order to capture the dividend. I briefly had thoughts of rolling over the position in order to maintain the dividend, but in hindsight, having seen the subsequent price decline, I’m happy to start anew with shares.

Like the desperate hedge fund managers, I may be inclined to emphasize capital gains on this position, rather than seeking to make most of the profit from option sales, particularly as the dividend is now out of the equation.

I may be in the same position of suffering early assignment on existing shares of International Paper (IP) as it goes ex-dividend this week. With a spike in price after earnings and having a contract that expires at the end of the monthly cycle, I had tried to close the well in the money position, but have been faced with the paucity of reasonable ask prices in the pursuit of buying back options. However, even at its current price, International Paper may be poised to go even higher as it pursues a strategy of spin-offs and delivery of value to its investors.

With decent option premiums, an attractive dividend and the chance of further price appreciation, it remains a stock that I would like to have in my portfolio.

Mosaic (MOS) is a stock that I have had as an inactive component of my portfolio after having traded it quite frequently earlier in the year at levels higher than its current price and last year as well, both below and above the current price. It appears that it may have established some support and despite a bounce from that lower level, I believe it may offer some capital appreciation opportunities, as with Intel. As opposed to Intel, however, the dividend is still in the equation, as shares will go ex-dividend on December 2, 2014. With the availability of expanded weekly options there are a mix of strategies to be used if opening this position.

It seems as if there’s barely a week that I don’t consider adding shares of eBay (EBAY). At some point, likely when the PayPal division is spun off, the attention that I pay to eBay may wane, but for now, it still offers opportunity by virtue of its regular spikes and drops while really going nowhere. That typically creates good option premium opportunities, especially at the near the money strikes.

I currently own shares of Sinclair Broadcasting (SBGI) a company that has quietly become the largest owner of local television stations in the United States. It is now trading at about the mid-point of its lows and where it had found a comfortable home, prior to its price surge after the Supreme Court’s decision that this past week finally resulted in Aereo shutting down its Boston offices and laying off employees, as revenue has stopped.

Sinclair Broadcasting will be ex-dividend early in the December 2014 option cycle and offers a very attractive option. It reported higher gross margins and profits last week, as short interest increased in its shares the prior week. I think that the price drop in the past week is an opportunity to initiate a position or add to shares.

Mattel (MAT) is a company that I haven’t owned in years, but am now attracted back to it, in part for its upcoming dividend, its option premium and some opportunity for share appreciation as it has lagged the S&P 500 since its earnings report last month.

However, while holiday shopping season is approaching and thoughts of increased discretionary consumer spending may create images of share appreciation, Mattel has generally traded in a very narrow range in the final 2 months of the year, which may be just the equation for generating some reasonable returns if factoring in the premiums and dividend.

Twitter (TWTR) continues to fascinate me as a stock, as a medium and as a source of so many slings and arrows thrown at its management.

Twitter has always been a fairly dysfunctional place and with somewhat of a revolving door at its highest levels before and after the IPO. While it briefly gained some applause for luring Anthony Noto to become its CFO, the spotlight heat has definitely turned up on its CEO, Dick Costolo.

Last week I sold Twitter puts in the aftermath of its sharp decline upon earnings release. While the puts expired, I did roll some over to a lower strike price as the premium was indicating continued belief in the downside momentum.

This week I’m considering adding to the position, and selling more puts, especially after the latest round of criticisms being launched at Costolo. At some point, something will give and restore confidence. It may come from the Board of Directors, it  may come from Costolo himself or it may even come from activists who see lots of value in a company that could really benefit from the perception of professional management.

I’m not certain how many times I’ve ended a weekly column with a discussion of Abercrombie and Fitch (ANF), but it’s not a coincidence that it frequently warrants a closing word.

Abercrombie and Fitch has been one of my most rewarding and frustrating recurrent trades over the years. At the moment, it’s on the frustrating end of the spectrum following Friday’s revelations regarding sales that saw a 17% price drop. That came the day after an inexplicable 5% rise, that had me attempting to rollover an expiring contract but unable to find a willing seller for the expiring leg.

Over the course of a cumulative 626 days of ownership, spanning 21 individual transactions, my Abercrombie and Fitch activity has had an annualized return of 32% and has seen some steep declines in the process, as occurred on Friday.

This has been an unnecessarily “in the news” kind of company whose CEO has not weathered well and for whom a ticking clock may also be in play. Over the past years each time the stock has soared it has then crashed and when crashing seems to resurrect itself.

Earnings are expected to be reported the following week and premiums will be enhanced as a result. While I currently have an all too expensive open lot of shares I’m very interested in selling puts, as had been done on nine previous occasions over those 626 days. In the event assignment looks likely I would attempt to rollover those puts which would then benefit from enhanced premiums and likely be able to be rolled to a lower strike.

However, if then again faced with assignment, I would consider accepting the assignment, as Abercrombie and Fitch is due to go ex-dividend sometime early in the December 2014 option cycle. However, I would also be prepared for the possibility of the dividend being cut as its payout ratio is unsustainable at current earnings.

 

 

Traditional Stocks:  Cypress Semiconductor, eBay, Intel, Mattel, Mosaic, Sinclair Broadcasting

Momentum: Abercrombie and Fitch, Twitter

Double Dip Dividend: International Paper (11/13)

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.

Jun172014

A Word About Sinclair Broadcasting

Daily Market Update Comment

Just a word about SBGI.

If you notice the premium with barely 3 days remaining on the $30 contract is unusually high at about $1.25, as shares are down about $0.90 to $30.40

The reason is probably because the Supreme Court is expected to issue its decision on  Aereo broadcasting either this week or next.

If it’s this week SBGI shares will likely move very big, in one direction or another. If Aereo wins or can in any way continue re-broadcasting SBGI will likely go lower. The option market currently believes that the movement can be in the $28–32 range.

The issue then becomes one of what to do.

Close the position by buying back the option and selling shares and greatly reduce the ROI?

Roll over to the 7/19 option (earnings are in August) for a net of about $1.20 additional premium, but still at risk for a share decline, albeit with a month to recover any drop in share price?

Take the chance that either the decision will be made next week orthat the decision will be this week and will be in SBGI’s  favor.

At the moment I’m leaning toward the final choice, but if shares go below the strike level prior to any announcement this week I will likely do a roll over to the July 2014 option.



May242014

Weekend Update – May 25, 2014

Weekend Update Comment

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that initial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 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.

Aug242013

Weekend Update – August 25, 2013

Weekend Update

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

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

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.