Everyone has been there at one time or another in their lives.
Maybe several times a day.
There is rarely a shortage of things and events that don’t serve or conspire to make us crazy.
Recurring threats of a government shutdown; the 2016 Presidential campaign; the incompetence in the executive suites of Twitter (TWTR) and pumpkin flavored everything, for example.
I add the FOMC to that list.
Although his annual Twitter campaign against pumpkin flavored everything has yet to start this year, there is scant evidence that Marek Fuchs, a wonderful MarketWatch columnist, has actually gone crazy.
However, as opposed to the hyperbole that typically characterizes the situation when someone is claiming to be made “crazy,” traders may be actually manifesting something bordering on the insane as members of the Federal Reserve toy with the fragile flowers they are in real life.
The alternating messages that have come from those members, who at one time, not too long ago, were barely seen, much less heard, have unsettled traders as the clock is ticking away toward this coming week’s FOMC Statement release.
Couple their deeply seated. but questionably held opinions regarding the timing of an interest rate increase, with the continuing assertion that the FOMC will be “data dependent,” and a stream of conflicting data and if you are prone to be driven crazy, you will be driven crazy.
Or, at the very least, prone to run on sentences.
My father, an escapee from communist Hungary, was fond of saying “this is a free country,” when looking at seemingly disturbed people spouting off their ideas. Where he may have drawn the line was when those publicly expressed ideas may have created danger.
One of the last things he saw in his life was the image of Michael Jackson dancing on the roof of a car outside of a Los Angeles court house and he said as I predicted he would.
I think that sight actually left him with some bemusement and joy, although I don’t think he would have felt the same listening to the parade of FOMC members and then watching the ensuing fallout,
Luckily, only “the 1%” are put at risk from the danger that might arise when the Federal Reserve alternates its messages, as if in some behavioral laboratory, to gauge the responses from investors, who are typically prone to give in to primitive brain centers.
That means that their responses will be either based upon fear or greed.
The past two weeks have had some of both, as there has actually been very little fundamental news to drive markets that have suddenly awakened from a mid-summer slumber.
Instead, what those weeks have had ever since the Kansas City Federal Reserve’s annual blast in Jackson Hole has been a barrage of opinions that seem eerily constructed to make investors uncertain.
That’s just crazy, but it really does seem as if the FOMC is testing the waters when we all know that they should instead be laser focused on their dual mandate, which as best as I recollect, does not include pulling the marionette strings to the New York Stock Exchange.
On a positive note, if investors are in a temporal state of being incapable of demonstrating independent action and have fallen into a pattern of passively responding to cues received from above, can they truly be crazy?
What is clear is that investors have actually been extraordinarily rational in their actions, even as alternating between the surges and plunges that would make a “bi-polar” diagnosis obvious.
What investors have demonstrated is that they accept the need for an economy that could justify an increase in interest rates.
Like a New Orleans denizen who believes in the need for public decency laws, however, there is still a prevailing belief that the good times must roll.
In the belief that an interest rate increase would be a good thing if the economy warrants one, is also the belief that we need some more time to party with cheap money.
Even New Orleans has its last calls and we will find out this coming Wednesday whether the party is over.
If rates are increased on Wednesday, the immediate response would likely be to believe that the party is over, but that would really be crazy.
The party may just be starting.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
With memories of what now seems to have been a poorly justified interest rate increase in December 2015, you might understand why some fear a repeat this coming week.
I doubt that the FOMC would make that same mistake of mis-reading the economy’s direction this time around and would be inclined to believe that if rates are increased, it should only be construed as a good sign for those who believe that stock markets should be ruled by economic fundamentals and not primitive centers of the human brain.
However, my own primitive center, at least the one that is still capable of function, tells me that the knee jerk reaction that could ensue if rates are increased, might create a risk that is well out of proportion to the reward of initiating any new positions in the early part of the week.
I had 3 assignments this past week, which would have been the norm in the previous 5 years, but has been far from my 2016 experience.
Whereas in previous years my inclination after having had weekly assignments would have been to find the very next and best place to invest that money on Monday, this week, my inclination is to park it under a mattress.
Of course, if the FOMC doesn’t raise interest rates this week, the market may be very likely to celebrate and I’ll have missed out.
I’m not certain if “the fear of missing out” is really a primitive response, but it is a powerful one.
However, I’ll take that chance, particularly as I mis-read almost every day of the previous week as the futures were trading in the pre-open. I saw no reason for any kind of pronounced market moves, but they turned out to be a dime a dozen last week.
I’ve been a big fan of the always volatile and always interesting ProShares UltraSilver ETN (AGQ) for years.
While being a fan, that doesn’t preclude being made crazy by holding it as a long term position, even as it’s structure was never intended as anything other than a trading vehicle.
What it has offered has been an adrenaline rush, some occasional realized losses, some occasional realized gains and a great stream of option premium income.
If you’ve been following precious metals at all, even casually, you may have noticed that the past few months have seen wild moves from day to day. That is what volatility is all about and volatility is what option premiums are all about.
I can’t begin to guess where gold and silver prices are going next, but share prices will go even faster when using a leveraged product such as this one.
If you have some discretionary cash and are not prone to moments of panic, this may be a good time to consider a position in the ProShares UltraSilver ETN.
While I would likely add to my existing positions with either the sale of puts or a traditional buy/write, I would set my initial sights on a weekly contract and the hopes for a quick entry and exit.
However, in the event of an adverse price move lingering up until the expiration, I might consider extending the expiration date to something longer than just an additional week and would seriously consider a longer term that also moves the strike price to make the wait even more worthwhile.
For those who really don’t shy away from risk, rather than rolling over a position and incurring the unnecessarily high costs, as the premiums are in $0.05 units and the low liquidity may create bid – ask spreads larger than preferred, the dice can be rolled by allowing expiration and then waiting for the next opportunity to create a new short position in the case of calls.
In the event that it’s a short put that isn’t going to be rolled over, you then will own shares that will be crying out for the sale of calls whenever possible.
Far less exciting than silver is Fastenal (FAST).
With only monthly option premiums, it is definitely not a trading kind of stock, but despite its ups and down, it has really been a reliably good holding for me over the years.
Fastenal is one of those companies that flies under the radar, but is a really good indicator of where the economy is at the moment. Its commercial and consumer business may be every bit as good of a reflection of what the economy is doing than anything whose report we await as we watch the embargo clock tick down.
It is now sitting at about its 6 month low and has some support. What it also has is a nice option premiums and a nice dividend, while it is prone to large price moves when earnings are announced.
Fastenal is actually one of the very early ones to announce earnings and even as we are just coming to the end of the current earnings season, the new one starts in just a few weeks.
Since Fastenal only trades monthly options, I would likely consider selling a November 2016 or later call option to have a better chance of collecting the dividend and to also have a better time enhance option premium cushion to enhance any downside surprise.
What Fastenal has one on multiple occasions over the past few years has been to offer revised guidance prior to the release of earnings. If you’re of the belief that the FOMC will see a reason to raise interest rates sooner rather than later, Fastenal may be in a position to see the reasons for that before its customers do and their guidance may be the push for shares to reverse its recent course.
Dow Chemical (DOW) isn’t very exciting either, unless of course the unexpected happens with regard to its proposed complex merger with DuPont (DD).
Even then, however, I think that the premium first exhibited by shares when the announcement was made, has long since been washed out and there may actually be upside potential in the event of a regulatory surprise.
I had some option contracts expire this past week and had no interest in rolling them over, because I believed that Dow Chemical would be at least as strong as the market in the coming weeks and I wanted to wait for a higher strike price at which to write new calls in an effort to optimize the combination of share gains, option premiums and capture of the upcoming dividend.
Dow Chemical has been trading in a very stable range, but it, too, is prone to some paroxysms. Those large moves in the past also make the future a little less predictable, as there are fewer support levels, but one very positive note in the past year has been the performance of Dow Chemical has finally disassociated itself from the performance of oil.
If purchase more shares this week, I’m likely to do so while writing a longer term call contract in order to have a better chance of capturing the dividend at the end of the month. I think that I would also select a strike price that would look to accumulate some profits on the underlying shares, as well, rather than just looking for short term gains from the premiums and the dividend.
Bristol Myers Squibb (BMY) probably suffered far too great of a loss following the disappointing results of a recent clinical trial of one of its anti-cancer agents.
The market reacted as if the nails were being pounded into the coffin of that drug, having neglected to recall that it is already in use for other cancers, while still being evaluated in the treatment of even others. What the market has also forgotten is that not all drugs must be effective in their own right. They may still have a bright future when used as part of a combination therapy approach, so the story on Opdivo may yet be told.
As with Dow Chemical, it has an upcoming ex-dividend date a few weeks away. Similarly, I think, especially following its recent price decline, I would sacrifice some option premium for capital gains on the underlying shares and would sell at a strike level higher than I would normally consider.
Finally, I don’t consider many trades where I might like an immediate assignment, but Las Vegas Sands (LVS), which is ex-dividend on Tuesday and has a very generous dividend for your troubles, may be the one to tempt me this week.
Most often, when the dividend is greater than the strike units, in this case a $0.72 dividend and $0.50 strike units, it’s difficult to sell an in the money option and really have an chance of securing a profitable trade in the event of an early assignment.
That may not be the case with Las Vegas Sands this week.
Using this past Friday’s closing prices by means of example, at a share price of $58.31, a September 23, 2016 $57.50 call option could be sold for about $1.27.
The likelihood is tat if Las Vegas Sands’ share price was above $58.22 at the close of trading on Monday, the day before the ex-dividend date, it would stand a chance of being assigned early, in order for the option buyer to capture the dividend. The more “in the money” the shares might be, the greater the likelihood of an early assignment.
In the event of that early assignment, the net result would be an $0.81 loss on the shares, which would be offset by the $1.27 premium. That would result in an 0.8% ROI for the day.
Of course, there’s always the chance that shares might go below $58.22 and you would get the dividend and the premium, but then be on the line for the risk associated with the shares.
Having 2 lots of Las Vegas Sands shares currently, I can tell you that risk can be substantial, especially if looking at the recent price trajectory.
If you believe that the Chinese economy is actually improving, that perceived risk may not be as great as the real risk.
Of course, in the business that Las Vegas Sands participates with, the divide between perceived risk and real risk is the reason that the house rarely loses.
In stocks, it really is a zero sum game, but that doesn’t matter to the one of the losing side of the equals sign.
While it may make you crazy to be on the losing side of that trade, it also feels really good to either be on the winning side.
Or to stop banging your head against the wall, as I may take a respite from even the compelling trades this week.
Traditional Stocks: Bristol Myers Squibb, Dow Chemical, Fastenal
Momentum Stocks: ProShares UltraSilver ETN
Double-Dip Dividend: Las Vegas Sands (9/20 $0.72)
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.
