This past week was the first full week of earnings for this most recent earnings season and you could be excused for wondering just how to interpret the data coming in.
The financial sector had fared well, but if you were looking for a pattern of revenue and earnings beats, or even looking for a shared sense of optimism going forward from a more diverse group of companies, you’ve been disappointed to date.
For the most part, this past week was one of mixed messages and the market really rewarded the messages that it wanted to hear and really punished when the messages didn’t hit the right notes.
With so much attention being placed on the expectation that the FOMC would have sufficient data to warrant an interest rate increase in December, you might have thought that companies would start painting a slightly more optimistic image of what awaited their businesses, perhaps based upon a building trend from the past quarter.
That optimistic guidance has yet to prevail even as some have been reporting better than expected revenues.
But no one should be surprised with the mixed messages that the market hasn’t been able to interpret and then use as a foothold to move in a sustained direction.
The mixed messages coming from those reporting just follows the wonderful example of streaming mixed messages that have been coming at us all year long from members of the Federal Reserve.
Unfortunately, good earnings and guidance from the financial sector aren’t sufficient to serve as the tide to carry others, even as they may be necessary for a broad wave of market expansion. Also unfortunate is the fact that the good fortunes, or at least the perceived good news from the likes of Netflix (NFLX) and UnitedHealth Group (UNH) aren’t the sort of things that lead and move the economy and the stock market.
That used to be what International Business Machines (IBM) did, but no more.
The messages, thus far, from the all important technology sector, have reflected the mixed messages of the past week. For the past 30 years the health of the technology sector has been critical to overall market health, but this week the picture is muddled, even as Microsoft (MSFT) hit an all time high.
While it’s easy to dismiss the individual investor class as lacking the insight and sophistication to understand the environment, the professionals in the options market certainly got things wrong this week as their expectations for the range of price movements from those reporting earnings very often grossly underestimated those ranges.
Let’s face it.
If the investing professionals really knew what they were doing or really understood market dynamics, there would be very few large price swings.
Other than a tsunami or some other natural disaster, what surprises should there really be to so drastically alter the prospects or fortunes for any S&P 500 company?
Of course, the investing professionals, who through their acumen set stock prices often predicate their expectations on the work of those other professionals. You know, the ones who come up with earnings estimates based upon their profound understanding of the companies that they so closely follow.
The coming week has lots more earnings to come and ends the week with a GDP report, as we get closer and closer to a December FOMC meeting.
If earnings do not start to buoy the market, especially as retailers get their turn in a couple of weeks, I’m concerned that the FOMC’s seeming insistence on getting one rate increase in by year’s end, could cause a strong sell-off, especially if positive guidance is being suppressed out of self interest.
What the market needs and has always needed is clarity and not mixed messages. Corporate leaders could also play their part by dropping a strategy of under-promising if they know their business trend to be in the right direction.
We could all benefit from a moratorium on mixed messages.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I’m not certain that I would categorize any of the recent messages coming from Wells Fargo (WFC) as being “mixed.”
Disingenuous? Perhaps.
Totally clueless as to how they would be received? Absolutely.
But given the recent events, the fall from grace hasn’t been that horrific and there may be some stability settling in, although there could be one of those unseen tsunamis ahead that even the professionals might be excused for not predicting.
The option premiums isn’t expecting much continued volatility and although that market has under-estimated some earnings volatility, it is generally fairly good.
With an upcoming dividend during the November 2016 option cycle, I think that the financial sector tide is also there to help float Wells Fargo as it seeks to right its own ship in a public fashion.
The more clear those public messages and actions will be, the better served will shareholders be and I think this is a good opportunity to capitalize on the combination of the dividend and option premium.
One message that became clear again is that content is back in vogue.
Just take a look at how Comcast (CMCSA) has performed ever since it announced that it was going to purchase the remainder of NBC-Universal from General Electric (GE).
click to enlarge)
While Comcast may not be entirely comparable to AT&T (T), it may be useful to include the latter in the chart as well, after news came of a potential takeover of content king, TIme Warner (TWX).
The initial reaction to the news sent AT&T shares down 3%.
After that price decline, I think that the only company specific price decline that may await, is if the deal, assuming that it is progressing toward completion, falls apart.
That’s because by then it will be pretty clear that the combination is a good one and unlike the disaster that was the case with the AOL combination, the corporate cultures are not entirely dissimilar.
I want to go for this ride and may very well consider longer term dated options in an effort to also capitalize on the prospect of recapturing that 3% decline.
With Saturday afternoon’s report that a deal is ready to be announced over the weekend, I would be very interested in jumping on the opportunity if AT&T opens lower to begin the week.
Finally, we all know the old saying about a broken clock. I don’t think that there’s anything similar for a broken record, but after having some Marathon Oil (MRO) puts expire last week, recommending it again is definitely becoming a broken record.
For me, that means 10 positions in the past 7 months and an eagerness to add another position in the coming week.
As often may be the case when using a covered option strategy that prefers a short term holding period, there isn’t necessarily anything about the company itself that supports or serves as a contraindication to an investment.
It’s all about the predictability of its price swings and the reward associated with the volatility.
Every now and then a stock appears that offers that combination of sharp price swings, but with the added feature of trading in a relatively narrow range.
For as long as Marathon Oil can do that, I don’t care if it’s a broken record and keep returning back to the same place.
Even though I still have a lot priced at about $28, the predominantly short term trades in 2016 on additional lots have more than offset the paper loss on that poorly timed position and afforded the opportunity to be patient.
With expiration of $14 short puts contracts last week, I would again be interested in the sale of puts, especially if Marathon Oil opens the week with some weakness.
As I mentioned in previous week, there are those little matters of upcoming earnings the following week and as of yet unannounced ex-dividend date.
Because of the earnings, if faced with a need to keep the short put position open, I generally try to sell longer term dated puts in order to get some additional protection and time, in the event of an adverse price move.
However, in this case, that might create some risk with the upcoming dividend. For that reason, I would usually prefer to take assignment of shares and then be in a position to write calls, if possible, while also trying to retain the dividend.
I do have an existing lot of $15 short puts expiring this week and expect to do exactly tat if faced with the need to roll those short puts over again.
Once earnings are done, I’m hoping that Marathon Oil spends the next 3 months continuing to be an excellent serial rollover candidate, whether through the sale of put options or as a traditional buy and write.
With it, the message hasn’t at all been mixed in 2016.
It’s mediocrity has been the stuff that dreams and profits are made of, as every broken record should sound so good.
Traditional Stocks: AT&T, Wells Fargo
Momentum Stocks: Marathon Oil
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.
