There was a time when the Chairman of the Federal Reserve did not hold press conferences.
In the past that would have been a very good thing, as the last Chairman to not have held press conferences, Alan Greenspan, was cryptic. When he did speak, such as during congressional testimony, he could send markets gyrating to opposite extremes before even having uttered a single verb.
When Ben Bernanke succeeded him and introduced the concept of a regularly scheduled press conference people were thrilled with the idea that there would be a new era of transparency and an end to the use of words shrouded by their own opacity.
For the most part Ben Bernanke’s press conferences were yawners. Not because of a lack of interesting subject matter, but because the markets rarely reacted to any new insights and inadvertent slips of strategic policy intentions just weren’t going to come from someone who carefully measured every word.
Now it was Janet Yellen’s turn and there had even been talk of her holding such press conferences after each FOMC minutes release and not simply on an alternating monthly basis.
Yellen performed admirably, once you get over the fact that with your eyes closed she sounds like Woody Allen’s sister, never batting an eyelash when one questioner twice referred to the FOMC members as “you guys” and then herself once referred to the cultural phenomenon of “shacking up,” it was what she said or didn’t say or maybe meant or maybe didn’t mean that sent the market abruptly tumbling at 3:04 PM Wednesday afternoon.
What was learned was that in a world of imprecision, especially when discussing time frames, any lapse that leads to a more precise time frame can create reactions from people that claim to loathe uncertainty but are really more afraid of certainty. The very idea that interest rates might begin to rise as soon as 6 months from now as part of a strategic plan by the Federal Reserve was a momentary reason to panic.
But was it really because of what Janet Yellen said or more a case of traders going to a second or even third derivative of the consequences of whatever it is that she may have said or may have meant.
That seems like good enough reason to exercise the emotional part of a coherent investing strategy.
The market’s response this week showed that it is very much on edge and harbors a significant amount of nervousness, but it also shows impressive reparative ability.
Over the past few weeks it is that reparative ability that has repeatedly been tested and repeatedly met the challenge.
With continued challenges in mind, this week more of my attention is focused upon positions that may be less susceptible to a breakdown in the event of a market giving into some of the challenges that may await. While in recent weeks I haven’t been adverse to more risky or volatile positions, I once again find myself not being attracted to risk as the market is again near all time highs, despite its seeming resilience and resistance to challenges.
As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).
The world of a stock analyst continues to confound me. On the one hand, I saw this week’s decline in shares of Bristol Myers Squibb (BMY) as an opportunity to consider bringing it back into my portfolio, particularly since I need additional healthcare representation. However, this week came a curious assessment from analysts at The Jeffries Group who raised their price target of shares to $48 and issued a “hold” rating on shares.
Since a $48 price target is about 10% below the Friday’s close, which itself is 8% lower than where shares started the month, it does beg a question or two.
Rather than asking those questions, I like what appears to be an opportunity, having waited for shares to return to my comfort level. The fact that Bristol Myers will be paying a dividend shortly further encourages me to consider going for the trifecta; an increase in share value, an option premium and the dividend, during what is hoped to be a short period of ownership.
British Petroleum (BP) is another stock that has seen its shares fall about 8% this month. I haven’t owned shares since November 2012, but have been anxious to do so since that time, futilely hoping that it would return to the $43 level at which I had repeatedly traded its shares. Sometimes you may have to give up some hopes and perhaps come to the realization that after its 8% fall that may be the biggest gift that is to come. While its option premium is less rich than I would like the enticement of its dividend makes it one of those companies that I don’t mind owning for more than an occasional short term fling, particularly since it doesn’t appear to be poised to present undue risk, even in a falling market.
While British Petroleum may now seem to have much in the way of added risk, Holly Frontier (HFC) is not exactly be a prototypical stock to consider when looking to avoid risk. It certainly trades with some sudden and rapid moves in both directions and does so on a regular basis. Yet despite that kind of behavior it seems to also be very capable of finding its way back home. Having owned several times in the past few months and having just had shares assigned this past week, I’m interested in restoring them to my portfolio. The single caveat is that it is near the top of the range that I’ve had comfort initiating a position.
With the attentions of Nelson Peltz and Carl Icahn, Mondelez (MDLZ) and eBay (EBAY), respectively have seen their initial bursts of share appreciation moderate of late. Until Icahn came onto the scene eBay was one of my very favorite covered call trades as it so reliably traded in a range. His sudden interest and unimaginative plan to spin off the PayPal unit was initially news divulged by eBay upon its earnings announcement and it shifted focus from mediocre performance to activist investing.
Following some fairly nasty exchanges, including a battle of words with Marc Andreessen, who sits on the board of eBay, the share price has started moderating a bit, having gone down approximately 5% from its peak earlier this month. That’s still on the high end of my trading range, but the interest is returning and would be greatly enhanced with any further drop.
Mondelez, on the other hand, has made some peace with its activist and its shares have stagnated ever since. As with eBay and so many other stocks, I like stagnation, especially if punctuated with occasional bursts of activity that keeps traders and especially potion buyers ion their toes. Mondelez goes ex-dividend this week and that has been a good time to consider entering into a new position or adding shares.
A Court of Appeals ruling on Friday regarding debit card swipe fees was greeted by differing levels of enthusiasm for shares of Visa (V) and MasterCard (MA) that appeared to adversely impact MasterCard well out of proportion to the favor found in Visa. Despite the acknowledged greater market share that Visa controls in the debit card area, analysts predominantly noted an incremental benefit to MasterCard as well, however its shares fell sharply, placing it back in the attractive price range
LuLuLemon Athletica (LULU) reports earnings this week. With a new clothing line recently released and with new leadership, as an existing shareholder with much more expensively priced shares, my hope is that they will provide guidance that casts an optimistic light on its future fortunes. No stranger to large earnings related moves there is, however, the possibility that this earnings report could be the kind that a new CEO often uses for advantage by dumping all of the bad news and dead weight so that, by comparison, future earnings reports are glowing and reflect upon the new CEO.
The option market is implying a 10.5% move when earnings are announced. By some of its own historical standards that may be an understatement of what its shares are capable of doing and the direction has been predominantly on the downside. The 1% ROI that may be able to be obtained even with a 14% drop in share price may make that risk worthy for some, especially if you believe, as I do, that this earnings report will be greeted in a positive manner.
Family Dollar Stores (FDO) has not had a good month ever since a downgrade to “sell” and disappointing earnings from Dollar General (DG). Now near its yearly lows volatility has returned to its option premiums helping to balance the risk that may be associated with this purchase, despite its historically low beta level. I already own shares and have been fighting back its price drop by attempting to take advantage of that enhanced option premium. While there may be some disagreement about what an improving retail sector means for the lower echelon of retailers, such as Family Dollar Store, I subscribe to the “high tide theory” particularly since economic recovery is leaving many behind and increasingly tethered to the lower echelon of retail.
Other than being named as one of the world’s most ethical companies, there really was no other bad news to have accounted for International Paper (IP) being unable to capitalize on the market’s advance this week. It’s current price places it close to the lower end of its trading range and makes it increasingly appealing to own. With more spin-offs of its assets planned within the next few months in pursuit of a successful strategy that has seen a number of such assets spun off, International Paper has created and optimized value without the need for outside agitation and has been a good candidate for a covered option strategy in the past year.
Finally, GameStop (GME) reports earnings this week. It received a blow to its share price when Wal-Mart (WMT) announced that it was encroaching on GameStop’s core business by offering to exchange Wal-Mart shopping credit for used video games. Whether Wal-Mart believes that they have a potentially profitable product line in used video games or simply plan to use customer entry into the stores as a means of enticing them toward other Wal-Mart purchases isn’t clear, but I think that impact on GameStop will be far less than the market has already assigned.
Wal-Mart, priding itself on offering the lowest prices, isn’t likely to offer the highest prices on its game repurchases. Secondly, only the most desperate of families is going to garnish their kid’s video games, which through some tradition have become the property of kids to do with as pleased and then trade them in for a chance for even more Wal-Mart goods. The rightful owners of those games, the kids, are going to need a really compelling reason to go into Wal-Mart.
Adult gamers, on the other hand, may not have enough energy to re-direct their inertia and change their game swapping habits.
The option market is implying a 5.5% move upon earnings release and GameStop is certainly no stranger to large price swings. However, the sale of a put option at a strike price about 11% below Friday’s closing price can still return a weekly ROI of 1%. That’s the sort of fun that could have me easily glued to the ticker crawl on my stock screen.
Traditional Stocks: Bristol Myers Squibb, British Petroleum, eBay, Family Dollar Store, Holly Frontier, International Paper, MasterCard
Momentum Stocks: none
Double Dip Dividend: Mondelez (3/27)
Premiums Enhanced by Earnings: GameStop (3/27 AM), LuLuLemon Athletica (3/27 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.