About a year ago at this time, we were all waiting for what would turn out to be the first interest rate increase by the FOMC in nearly 9 years.
Once that increase finally arrived at the end of 2015, we were all preparing for what we were led to believe would be a series of small such increases throughout the course of 2016.
The problem, however, that stood in the way of those increases becoming reality was the FOMC’s insistence that their decisions would be data dependent. As we all know, the data to justify an increase in interest rates just hasn’t been there ever since that first increase.
The cynics, with the advantage of hindsight, might suggest that the data wasn’t even there a year ago, but that didn’t stop the FOMC from their action, which in short order took the market to its 2016 lows.
Back when those lows were hit in February, many credit Jamie Dimon, the CEO of JP Morgan Chase (JPM) for abruptly ending the correction by making a $26 million purchase of his own company’s shares. That wasn’t a terribly large amount of money, but it probably wasn’t a coincidence that the market turned on a dime.
Maybe we still haven’t returned to your grandfather’s fundamentals, but the message of confidence, without using “other people’s money,” gave a psychological boost to the market, even as JP Morgan shares didn’t garner similar benefit at the time.
As we are now in the final quarter of the year and time is running out for an interest rate increase in 2016, it may again be JP Morgan Chase in sharp focus as it gets the next earnings season underway this coming week.
This past week’s Employment Situation Report and its revisions didn’t do very much to bolster the thought that the workforce is expanding sufficiently to create inflationary pressures. However, next Friday we could be in store for a big dosing of data and opinion from those whose words have heft.
Friday morning JP Morgan Chase announces its earnings and perhaps more importantly may offer guidance that paints a picture of an awakening consumer already begun by the recent GDP release.
Not too many economic expansions begin without the leadership of the financial sector and JP Morgan is the undisputed leader.
Afterward, we get the Retail Sales Report and forecasters are expecting a nice bounce from the disappointments of the past 2 months.
Finally, with a chance to digest those earlier bits of information and much more, Janet Yellen is the keynote speaker at the “The Elusive Recovery,” the Boston Federal Reserve’s appropriately entitled conference.
If that Friday trio isn’t enough to give a sense of an impending interest rate increase, we also will have had nearly 2 days to digest the FOMC’s monthly minutes to get an idea of just how strongly some of those increasing dissenting opinions are being held.
It’s hard to imagine that we’re not now coming to a confluence of events as the clock is ticking away to close out the year.
While the actual FOMC action still remains, what really remains to be seen is whether the market will deserve to wear big boy pants up[on the news.
The one thing that has been consistent over the past few years is that the lack of any news supporting a near term interest rate increase has been met with enthusiasm.
What might really be met with enthusiasm as we near the end of 2016 is to stand in front of that tower, as the clock is ticking away and watch the crystal ball start moving higher instead of dropping.
Anything adding delay has been the investor’s friend, but the clock has to be ticking on that relationship, too. At some point, someone has to realize that the only way higher is to have an economy that can distinguish itself from Japan’s 20 year experience.
Of course, there’s always the chance that JP Morgan disappoints and doesn’t offer an optimistic outlook for 2017 and then we may get to do 2016 all over again.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I made a single opening position trade last week and it was not a good one.
Selling Pro Shares Ultra Silver ETN (AGQ) puts after a nice sized decline gave me a false sense of security that there might be opportunity in that decline. It never really occurred to me that there would be so much more to come, nor that there would be a breakdown in the British Pound, as well.
With oil breaking the $50 level again and precious metals in wild fluctuation, something is afoot, as we are still within about 2% of all time highs in the S&P 500.
While I do believe that the next 2 months may have some considerable upside potential if corporate guidance finally becomes positive, I would very much like to increase my cash reserves and am not terribly excited about adding new positions.
Still, if you live and die by income generation, it is nice to come across any opportunity that may appear to have limited downside risk separate from market risk.
Of course, I didn’t find that opportunity this past week, but would still be looking at any chance to re-establish a position in Marathon Oil (MRO).
That has been my “go to” position in 2016. While in past years I’ve had multiple such positions and really enjoyed buying and re-buying the same stocks, 2016 has been a singular story.
I was eager to repurchase shares or sell puts again on any meaningful decline, but it never came. Friday’s decline was a start in the right direction, but I would like to see those shares get closer to the $15 level.
If it does, I would again be inclined to sell puts and comfortable with that decision even if shares were to subsequently fall to about $14. There is enough liquidity in the option market to keep a short put position open by rollover if faced with a short term adverse price move and the premiums are rich enough to withstand such a move, if patience is part of your investing personality.
If faced with the need to rollover those short puts, I would also be mindful of November earnings and a November ex-dividend date. The latter comes about 2 weeks after earnings, so there could be reason to take assignment of shares and then write calls to capitalize both on the volatility associated with earnings and the potential capture of the upcoming dividend.
I’m still also interested in Blackstone Group (BX) this week. The only difference is that I like it even more following a 3% decline on the week.
As was discussed last week, the earnings report and the ex-dividend date may be concomitant or at least during the same contract expiration week near the end of the month. Just as last week, my interest in a position this week would be with a very short term focus, but I would be prepared to roll the short calls over to a date at least a week beyond the earnings and ex-dividend dates.
With a very attractive dividend that is historically subject to significant change, I would look at the possibility of Blackstone becoming a longer than intended term holding in the event of an earnings surprise, but I don’t expect the kind of bad news that would necessitate another decrease in the dividend.
In the nearly 4 years since Abbott Labs (ABT) spun off AbbVie (ABBV), there’s no doubt that the market has preferred the faster growing segment of the old Abbott Labs business. In the past 5 months, however, Abbott Labs has well out-performed both AbbVie and the S&P 500.
Both are ex-dividend this week and AbbVie has a more attractive dividend. I also do prefer its recent price action to the downside, as opposed to Abbott’s move higher.
Still, the combined premium and dividend associated with Abbott Labs looks more attractive to me, especially as Abbott Labs now offers weekly option premiums. That opinion is also influenced by the size of the AbbVie dividend, which is larger than the option pricing units. That makes it more difficult to get any meaningful subsidy of the dividend related price drop in shares by an inefficiently priced call option in the event of selling an in the money call.
Time, however, until earnings is running out more quickly on Abbott Labs, as it reports earnings the following week, whereas AbbVie doesn’t do so until the end of the month. For now, I would rather take my chances with earnings from the more staid Abbott Labs, as the more bio-pharmaceutically dependent companies have hit a recent rough patch.
Finally, at a 52 week low, Starbucks (SBUX) is looking very good to me right now. There are still about 3 weeks until both earnings and its ex-dividend dates, as it is another with nearly coincident dates.
Starbucks has been basically moribund through 2016 and has badly trailed the already moribund S&P 500 during the year, while sitting at a 52 week low.
None of that is a stirring endorsement and neither is the performance of shares after the past few earnings reports.
Expectations for Starbuck’s performance are usually high and it often does suffer after earnings, but prior to this year, Howard Schultz was consistent in his ability to convince investors that their initial interpretation of earnings was incorrect, if that reaction was a negative one.
As with Blackstone, my interest at this point is purely as a short term trade, as its recent weakness has contributed to a healthier than usual option premium. However, if faced with a need to rollover that position, I would again look at doing so with a new expiration date that may be a bit beyond earnings and the ex-dividend date.
With some anticipation that Starbucks will not disappoint on earnings this time around, if in a position to require a rollover, I would probably seek to do so with a higher strike price than was used for the initial position, in anticipation of better than expected numbers and Schultz pulling a long over due rabbit out of his hat.
It would be about time.
Traditional Stocks: Starbucks
Momentum Stocks: Blackstone, Marathon Oil
Double-Dip Dividend: Abbott Labs (10/12 $0.26)
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.