If you can remember as far back at the 1970s and even the early part of the 1980s, it still has to be hard to understand how we could possibly live in a world where we would want to see inflation.
It’s hard to think that what we thought was bad could actually sometimes be good medicine.
But when you start thinking about the “lost decades” in Japan, it becomes clear that there may be a downside to a very prolonged period of low interest rates.
Sometimes you just have to swallow a bitter pill.
And then, of course, we’re all trying to wrap our minds around the concept of negative interest rates. What a great deal when bank depositors not only get to fund bank profits by providing the capital that can be loaned out at a higher rate of interest than is being received on those deposits, but then also get to pay banks for allowing them to lend out their money.
For savers, that could mean even more bad medicine in order to make the economy more healthy, by theoretically creating more incentive for banks to increase their lending activity.
From a saver’s perspective one dose of bad medicine could have you faced with negative interest rates in the hope that it spurs the kind of economic growth that will lead to inflation, which always outpaces the interest rates received on savings.
That is one big bitter pill.
While the Federal Reserve has had a goal of raising interest rates to what would still be a very reasonable level, given historical standards, the stock market hasn’t been entirely receptive to that notion. The belief that ultra-low interest rates have helped to spur stock investing, particularly as an alternative to fixed income securities makes it hard to accept that higher interest rates might be good for the economy, especially if your personal economy is entirely wrapped up in the health of your stocks.
In reality, it’s a good economy that typically dictates a rise in interest rates and not the other way around.
That may be what has led to some consternation as the recent increase in interest rates hasn’t appeared to actually be tied to overt economic growth, despite the repeated claims that the FOMC’s decisions would be data driven.
Oil continued to play an important role in stock prices last week and was a good example of how actions can sometimes precede rational thought, as oil prices surged on the news of an OPEC agreement to reduce production. The fact that neither Iran nor Venezuela agreed to that reduction should have been a red flag arguing against the price increase, but eventually rational thought caught up with thought free reflexes.
While oil continued to play an important role in stock prices, there may have been more to account for the recovery that has now seen February almost completely wipe out it’s 2016 DJIA loss of 5.6%.
What may have also helped is the belief, some of which came from the FOMC minutes, that the strategy that many thought would call for small, but regular interest rate increases through 2016 may have become less likely.
The stock market looked at any reason for an increase in interest rates as being bad medicine. So it may not have been too surprising that the 795 point three day rise in the DJIA came to an abrupt stop with Fridays release of the Consumer Price Index (“CPI”) which may provide the FOMC with the data to justify another interest rate increase.
Bad medicine, for sure to stock investors.
But the news contained within the CPI may be an extra dose of bad medicine, as the increase in the CPI came predominantly from increases in rents and healthcare costs.
How exactly do either of those reflect an economy chugging forward?
That may be on the mind of markets as the coming week awaits, but it may be the kind of second thought that can get the market back on track to continue moving higher, similar to the second thoughts that restored some rational action in oil markets last week.
You might believe that a rational FOMC wouldn’t increase interest rates based upon rents and healthcare costs if there is scant other data suggesting a heating up of the economy, particularly the consumer driven portion of the economy.
While rents may have some consumer driven portion, it’s hard to say the same about healthcare costs.
Ultimately, the rational thing to do is to take your medicine, but only if you’re sick and it’s the right medicine.
If the economy is sick, the right medicine doesn’t seem to be an increase in interest rates. But if the economy isn’t sick, maybe we just need to start thinking of increasing interest rates as the vitamins necessary to help our system operate more optimally.
Hold your nose or follow the song’s suggestion and take a spoonful of sugar, but sooner or later that medicine has to be taken and swallowed.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
It’s not so easy to understand why General Motors (GM) is languishing so much these days.
As bad as the S&P 500 has been over the past 3 months, General Motors has been in bear territory, despite continuing good sales news.
What has been especially impressive about General Motors over the past few years is how under its new leadership its hasn’t succumbed or caved in as legal issues and potentially very damaging safety related stories were coming in a steady stream.
I already own some shares of General Motors, but as its ex-dividend date is approaching in the next few weeks, I’m considering adding shares, but rather than selling weekly options, would be more inclined to sell the monthly March 2016 option in an effort to pocket a more substantial premium, the generous dividend and perhaps some capital gains in those shares.
I wrote about Best Buy (BBY) last week and a potential strategy to employ as both earnings and its ex-dividend date were upcoming.
This week is the earnings event, but the ex-dividend date has yet to be announced.
The strategy, however, remains the same and still appears to have an opportunity to be employed.
With an implied move of 8% next week, there may be an opportunity to achieve a weekly 1% ROI by selling put options at a strike 10% below Friday’s closing price.
The risk is that Best Buy has had earnings related moves in the past that have surprised the seers in the options market. However, if faced with assignment, with one eye fixed on any upcoming announcement of its ex-dividend date, one can either seek to rollover those puts or take ownership of shares in order to secure its dividend and subsequently some call options, as well.
Alternatively, if a little risk adverse, one can also consider the sale of puts after earnings, in the event that shares slide.
Also mentioned last week and seemingly still an opportunity is Sinclair Broadcasting (SBGI). It, too, announces earnings this week and has yet to announce its upcoming ex-dividend date.
Its share price was buoyed last week as the broader market went higher, but then finished the week up only slightly for the week.
Since the company only has monthly option contracts available, I would look at any share purchase in terms of a longer term approach, in the event that shares do go lower after earnings are announced.
Sinclair Broadcasting’s recent history is that of its shares not staying lower for very long, so the use of a longer term contract at a strike envisioning some capital appreciation of shares could give a very satisfactory return, with relatively little angst. As a reminder, Sinclair Broadcasting isn’t terribly sensitive to oil prices or currency fluctuations and can only benefit from a continued low interest rate environment.
It’s hard now to keep track of just how long the Herbalife (HLF) saga has been going on. My last lot of shares was assigned 6 months ago at $58 and I felt relieved to have gotten out of the position, thinking that some legal or regulatory decision was bound to be coming shortly.
And now here we are and the story continues, except that you don’t hear or read quite as much about it these days. Even the most prolific of Herbalife-centric writers on Seeking Alpha have withdrawn, particularly those who have long held long belief in the demise of the company.
For those having paid attention, rumors of the demise of the company had been greatly exaggerated over the past few years.
While that demise, or at least crippling blow to its business model may still yet come to be a reality, Herbalife reports earnings this week and I am once again considering the sale of put options.
With an implied move of 14.3%, based upon Friday’s closing the price, the options market believes that the lower floor on the stock’s price will be about $41.75.
A 1.4% ROI on the sale of a weekly option may possibly be obtained at a strike price that is 20.4% below Friday’s close.
For me, that seems to be a pretty fair risk – reward proposition, but the risk can’t be ignored.
Since Herbalife no longer offers a dividend, if faced with the possibility of share ownership, I would try to rollover the puts as long as possible to avoid taking possession of shares.
While doing so, I would both hold my breath and cross my fingers.
Finally, as far as stocks go, Corning (GLW) has had a good year, at least in relative terms. It’s actually about 1.5% higher, which leaves both the DJIA and S&P 500 behind in the dust.
Shares are ex-dividend this week and I’m reminded that I haven’t owned those shares in more than 5 years, even as it used to be one of my favorites.
With its recently reported earnings exceeding expectations and with the company reportedly on track with its strategic vision, despite declining LCD glass prices, it is offering an attractive enough premium to even gladly accept early assignment in a call buyer’s attempt to capture the dividend.
With the ex-dividend date on Tuesday, an early assignment would mean that the entire premium would reflect only a single day of share ownership and the opportunity to deploy the ensuing funds from the assignment into another position.
However, even if not assigned early, the premiums for the weekly options may make this a good position to consider rolling over on a serial basis if that opportunity presents itself.
Those kind of recurring income streams can offset a lot of bitterness.
Traditional Stocks: General Motors
Momentum Stocks: none
Double-Dip Dividend: Corning (2/23 $0.135)
Premiums Enhanced by Earnings: BBY (2/25 AM), Herbalife (2/26 PM, Sinclair Broadcasting (2/24 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.
