As a movie a few years ago, “It’s Complicated,” starring Alec Baldwin, was a funny one that explored some aspects of life that many could relate to in one form or another.
A few weeks ago we were all surprised to learn of some new casting for the upcoming season of Saturday Night Live. But now after his successful appearances portraying Donald Trump, Alec Baldwin’s next role could very well be that of Janet Yellen.
While the Chairman of the Federal Reserve may not be as widely known as the Presidential candidate, for those that are aware of the very important role she plays in all of our lives, we could use something amusing to put events into perspective as we end so many days just shaking our heads wondering what is really going on.
Clearly, it’s complicated.
The one thing you know in life is that when you hear someone begin an explanation of anything with the qualifier “it’s complicated,” you had better be prepared to be deflated.
In the event you are paying attention to the world’s economies, deflated is not the direction anyone wants to be going.
Unlike the way it was portrayed in the movie, complications are usually not very funny, unless perhaps brought to life by Alec Baldwin.
Sometimes, “it’s complicated,” is just a way for someone to begin a long and winded rationalization in trying to explain how an endpoint was reached, especially when the route appeared to be illogical or the endpoint itself seemed to be the wrong destination.
In essence, in such cases, the hope is that you’re not smart enough to catch on or can be swayed into believing whatever it is that the story teller wants you to believe, which is often counter to your own best interests.
At other times, it’s just a diplomatic way to be told that you’re just not smart enough to understand, so don’t even bother listening and while I’m at it, why should I even be wasting my time trying to explain it to someone like you.
Well, you can take your pick when the Chairman of the Federal Reserve tells an audience at “The Elusive Recovery” conference that “it’s complicated,” if looking for a reason to explain why the FOMC has not raised interest rates in 2016.
As an investor, the degree of certainty plays a role in the decision making process and either supports confidence or erodes it. Our expectation is that what we mortals may believe is complicated is just “matter of fact” kind of material for the smartest people in the room.
What Janet Yellen said on Friday introduced a third way of interpreting what it means when someone tells you that “it’s complicated.”
Maybe the smartest in the room themselves don’t understand the dynamics of current day events.
That’s not very comforting and that doesn’t inspire too much confidence. Despite some really good news from the financial sector as earnings season began, the sense of optimism was fleeting as a sense of cluelessness came to replace it.
Still, the market is now of the strong belief that we will see an interest rate increase in December 2016 and it may be clearly signaling that while it supports an increase, it only does so when it doesn’t seem to be so near at hand.
It sort of like I accept the possibility of death when I’m 20 years old, but it doesn’t frighten me. Flash forward 50 years and you may think and act a bit differently
While Alec Baldwin may be able to make that all seem funny, as Janet Yellen or even as the Grim Reaper, it isn’t.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I generally do read like a broken record, but even for me this is getting a little ridiculous when I continue to pay attention to Marathon Oil (MRO).
After opening my ninth Marathon Oil position last week during 2016, I am ready for a tenth, even as last week’s position is still in my account.
The past week watched the stock market and energy prices re-establish the tethered relationship that they had maintained for much of 2016, although not quite as much in the past month or so.
Marathon Oil has been my “go to” stock for 2016, not because of anything inherently wrong or right with the company, but simply for its ability to be as resilient of a yo-yo as you can find in 2016.
What it has done is simply go up and down in big chunks, but maintained a fairly tight price range and offered a very attractive option premium at the same time, owing to those big price swings.
While option premiums tend to reflect price uncertainty, Marathon Oil has coupled that price uncertainty with range certainty.
I like that combination. That tends to give you an advantage in the risk – benefit balance.
I don’t care too much about what the company is doing nor too much about the specific macroeconomic events that may drive the price of oil. What I care about with this position, that I also find easy to trade if needing a rollover, is how to enter into it as earnings are upcoming in just 2 weeks.
My most recent position was through the sale of a put option that I subsequently rolled over. That position, if at risk of assignment at the end of the coming week will probably be rolled over again, but I would be mindful of the date of the upcoming dividend, which is expected sometime shortly after earnings.
Whether for that lot or any new lot in the coming week or next, I would prefer to be long shares and short calls in advance of the ex-dividend date, even as my preference would be to open another new position through the sale of puts again.
Seagate Technolgy (STX) reports earnings this week.
The option market is implying a price move of about 7%. You could potentially receive a 1% ROI for the sale of a weekly option right at a strike price defined as the lower boundary of the implied move.
That’s usually not sufficient of a reward for me relative to the risk and with Seagate Technology history has plenty of examples of price swings well in excess of 7%.
While the risk of computer hardware as a commodity has been discussed for years and Seagate Technology continually written off as a dinosaur, it survives and will likely do so for more than another earnings report.
However, after a significant run higher, you can easily make a case for an out-sized move in either direction, perhaps well in excess of 7%.
Where I would be interested is after earnings are announced and the dividend is confirmed, in the event of a considerable decline in share price.
In that event, I might be very interested in the sale of puts options.
Finally, sometimes you just wait for bad news and have to decide whether that is the time to take a stance.
With its split into two different companies in the past year, Hewlett Packard (HPQ) is no longer that complicated of a business, nor is it that interesting of a business. The split off entity, Hewlett Packard Enterprises (HPE), where Meg Whitman, CEO and Chairman of the pre-split entity, decided to relocate herself, retained the distinctions of complexity and of being interesting.
Essentially, now a hardware company in what is more or less a commodity, it announced layoffs and lowered guidance for the coming year at a time when expectations for 2017 are for a more involved consumer.
After all, if the consumer isn’t going to be participating in 2017, where is the justification for raising interest rates? Add to that how Hewlett Packard has a large consumer products base and you can see the potential problem.
Or the opportunity.
With the bad news also came news of a 7% increase in the already generous dividend, made even more generous with the past week’s price decline.
Just a week earlier, I had anticipated that my existing lot of shares was likely to be assigned from me as the October 2016 option cycle came to its end this week.
This week, I’m not overly sanguine about those prospects, but with earnings still a month away and an attractive premium befitting its very recent volatility, the 7% decline in the past week looks like a good entry point.
Although my most recent holding was for only a week and was only long enough to capture the dividend, I would be prepared for this to be a longer holding period. My existing lot of shares is now more than a year old, but I won’t mind continuing to hold onto it at this level if it can continue generating option premiums and dividends.
Sometimes, buying and inadvertently holding isn’t that interesting or complicated, but there’s nothing to laugh at when the income keeps accumulating even when the stock goes nowhere.
It really isn’t that complicated, after all.
Traditional Stocks: Hewlett Packard
Momentum Stocks: Marathon Oil
Double-Dip Dividend: none
Premiums Enhanced by Earnings: Seagate Technology (10/18 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.