We often have an odd way of accepting someone’s decision to change their mind.
A change of mind is frequently thought to be a sign of a poorly conceived conviction or a poorly conceived initial position.
Few politicians change their minds because they know that they will be assailed for weakness or for having caved in, as opposed to having given careful and objective thought to a complex topic.
Of course, then there’s also the issue of a politician changing their mind simply for political expediency or political advantage.
That kind of distasteful behavior, although perhaps pragmatic, just stokes our cynicism.
We sometimes get upset at a child’s frequent changes of mind and want to instill some consistency that ultimately stifles ongoing thought and assessment.
At the same time, as parents, we are often faced with alternating opinions as to whether we need to be consistent in application and formulation of the rules we set or whether there should be some ability to make the rules a living entity that is responsive to events and circumstances.
When I was a child, I attended a “Yeshiva,” which is a Jewish version of a parochial school. We were taught to abide by Biblical laws, include the law regarding Kosher foods.
One day, when I was about 10 years old, I found a package of ham in our refrigerator and confronted my mother about the blatant violation of a sacred rule.
Her response was, and I remember it some 50 years later, was “if it tastes good, it’s Kosher.”
Okay, then. There are rules and there are rules that can be changed.
Of course, we completely abhor it when someone changes their mind and moves away from a position that we hold near and dear, while at the same time rejoicing when someone changes an opinion to come over to our side.
Just a few weeks ago Janet Yellen was roundly criticized for changing her tone, as many asked what could possibly have happened in the economy in the intervening weeks to have caused a tangible shift in sentiment and more importantly, policy.
Yet, when it comes to the stock market, we accept incredibly rapid and seismic shifts on a regular basis, as if there had been tangible and readily identifiable reasons for those frequent 180 degree reversals.
Many seeking on air time express their changes of opinion without ever acknowledging their previous opinion. In those cases it’s not really a change unless the viewer remembers the preceding opinion, as the interviewer is rarely going to embarrass a guest or regular contributor.
In hindsight, it is sometimes easy to offer a rationale for sudden changes in direction. However, believing the rationale or believing the claim of identifying the variable at play, may be as delusional as offering the opinion.
The one thing that won’t change is that those hindsight and revisionist pats on the back will never change.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
A month ago I wrote about one of the available investment tools that tracks “volatility.” When discussing the potential use of iPath S&P 500 VIX Short Term Futures ETN (VXX), it was in the context of the then upcoming FOMC announcement.
As the short term trade as which it was intended, that timing was fortuitous. However, if held onto or rolled over in an effort to milk even more of the rich premium, it would not have been very fortuitous as that trade really did end along with the FOMC announcement.
The reversal of volatility was a reflection of the suddenness with which change comes to investor sentiment.
The performance of the Volatility Index at the end of last week and the every beginning of this week had lots of people confused as the typically expected association between a declining market and an increasing measure of volatility broke down, especially during those periods that large declines were reduced heading into the close.
When that does happen and it happens infrequently, it is very often a sign of a real reversal ahead and that is certainly what we saw as the market completely changed its mind when the opening bell rang on Tuesday.
With volatility again at 2 year lows, there can be reason to believe that we are at an inflection point as the market may attempt to test its handful of resistance levels below its all time closing high.
But that inflection point can also bring a move in the opposite direction, as those points are a perfect place to teeter and either catapult or plunge.
With good liquidity and an always provocative premium, even an adverse movement can be played by rolling over to a longer term expiration. I almost always prefer initiating a position through the sale of put options.
Another potential opportunity could have come heading into the “Brexit” vote, but both the outcome of the vote and the response to the result were so unpredictable, that I didn’t consider its use at that time.
But that’s ancient history by now and more predictable opportunity may again be here.
With earnings season ready to begin just a week from now, the equation must again be mindful of the kind of havoc or opportunity that can be created when a penny here or a penny there comes as a surprise.
The real surprises ahead may be related to forward guidance, as we can begin expecting lots of companies to begin moaning about the potential impact of the “Brexit” vote and currency exchange hardships.
At a time when very few companies have been winning fans over on the basis of their earnings the next few months can be especially challenging and I’m wary of selecting positions with a short term mindset if that short term crosses the date of earnings reporting.
In the case of MetLife (MET) that means almost a month before the risk of earnings is added to the continuing risk associated with plummeting interest rates.
If you could somehow go back in time to when the FOMC announced a small interest rate increase in December 2016, you would probably have a really hard time finding anyone who would have believed that 6 months later we would not have had another or even two increases and that the 10 Year Treasury would be offering a 1.46% yield.
What you would have found, as those yields went lower and lower, was that even the relative hawks within the Federal Reserve were squawking less and less as they changed their minds about where the future was going to take the US economy.
While General Electric (GE) recently lost its “Systemically Important” label and shackles by virtue of shedding significant financial assets, MetLife did it the old fashioned way.
They litigated in order to prevent such a designation and won in its battle.
It’s hard, however, to make a case that MetLife shares were rewarded in any way relative to their peers or the S&P 500 since having won that battle.
It’s that under-performance and that enhanced premium that have me interested in adding shares.
With earnings scheduled for August 3, 2016 and an as of yet unannounced ex-dividend date. Traditionally, the ex-dividend date is the same or following day of earnings, except for the 2nd Quarter report. There has typically been a one week lag when 2nd Quarter earnings are announced.
In this case, if a purchase of MetLife shares is warranted, I would consider the sale of a longer term call option, such as the August 19, 2016 and would also give strong consideration to the use of out of the money strikes, as opposed to the shorter term and near the money or in the money strikes.
While I still suffer with a much more expensive lot of Marathon Oil (MRO), that suffering has been attenuated a little bit in 2016 as I’ve now owned new shares on 4 occasions as it has been a repository of volatility.
That’s meant that it has had a really enhanced option premium as it has gone back and forth, changing its mind along the best of the undecided.
In doing so, its path has been higher and higher in 2016, yet those large moves have kept the premiums at very, very attractive levels.
After another assignment this past week, I would very much like to go for a fifth round of ownership, although this time, I think that I’m more inclined to consider the sale of out of the money put options, rather than the buy/writes that I had been doing.
I reserve the right to change my mind, though.
With West Texas Intermediate having fallen from and then rebounded back to the $50 level, Marathon Oil has followed suit and there isn’t too much reason to believe that the near term will bring an assault on the $47 level.
However, if it does, there is sufficient liquidity in the put market to be able to rollover those puts, although this is a position that I would also consider owning outright if faced with assignment of shares.
For those dealing with smaller lots the transaction costs differential between rolling over puts versus taking assignment and then writing calls may be a factor.
In either event, earnings are upcoming on August 3, 2016 and if owning shares or still short puts, I would likely consider utilizing an expiration date a little further out in order to withstand any possible large decline, but to also give an opportunity to secure the dividend, as paltry as it may currently be.
Finally, while the correlation between falling oil prices and rising airline prices has long ago withered and while there may not be much reason to suspect any sustained oil price decline, I’m ready to add more airline shares.
As with Marathon Oil, I still suffer from holding a much more expensive lot of shares of United Continental Holdings (UAL).
At the moment, it’s really hard to see anything positive at all, about the business.
Currency pressures, increasing fuel prices, worries over international travel are enough to include in a single sentence. However, as United Continental rebounds from its 2 year lows, I think that the slew of bad news and lowered expectations are mostly discounted.
Since United Continental does not offer a dividend and has been exceptionally volatile of late, this is one position that I would consider only through the sale of puts at this time. With that, however, you do have to be aware that earnings will be reported in just 2 weeks, so if still short those puts heading into earnings, there may be good reason to limit downside risk by rolling over the position to a date far enough into the future to allow some reasonable recovery time.
That time may be longer than anticipated, however, as my current lot of shares sits uncovered and had previously sold options with expirations 3 or more months into the future.
My actuary tells me that I may not live to regret that, so I do take some comfort in that knowledge.
Hopefully, he won’t change his mind.
Traditional Stocks: MetLife
Momentum Stocks: iPath S&P 500 VIX Short Term Futures ETN, Marathon Oil, United Continental Holdings
Double-Dip Dividend: none
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.
I still have a fascination with license plates and the bumper stickers put on their cars.
