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Daily Market Update – January 21, 2014 (Close)
With everyone of any importance being in Davos for the 2014 Global Economy meeting, it’s a good week to have almost no economic news scheduled to be released.
Instead, it’s a week of photo opportunities in the snow and dealing with the avalanche of earnings, not to be confused with actual avalanches in the Swiss mountain resort of Davos.
Starting the week is unexpected news that activist Dan Loeb is taking a stake in Dow Chemical. He was very successful recently in Yahoo!, probably getting out way too early and then not quite as successful with his interest in Sony.
Dow Chemical was a stock bought 9 times in 2013 and another 7 times in 2012. I was anxious to buy it again, but it suddenly is set to escape its longstanding mediocrity in its trading which is more than a decade long.
While I hate seeing a reliable stock get removed from rotation, this is an important bit of news, based on Dow’s market capitalization. Although Yahoo! is now a $40 billion company, it was far from that when Loeb became involved. Dow Chemical is already a $52 billion company and Loeb’s ownership is “only” about 2% of the market capitalization
That kind of commitment to a company that is closely tied with economic growth and expansion is a vote in that direction. The vote is in the way that counts most; with Loeb’s own money.
While no one has a crystal ball, Loeb’s interest in Dow Chemical is interesting in what many think is the very late stage of a stock market bull run. Clearly, Loeb doesn’t believe that the top is near.
What we don’t know is what Loeb’s time frame is, as he has shown the inclination to move on. The longer his time frame, the less relevance his actions have on how to look at tomorrow or the day after.
Given some of the details surrounding Dow Chemical’s Board of Directors, it appears as if there is almost a year before any board seats could be gained, so in the interim the changes at Dow, if any should be slow and strategic in nature.
That means that even if Dow has escaped its trading orbit and gone to a new level, it may still be attractive even at that higher level, as its option premium is likely to increase and it has a nice dividend.
But that’s a consideration for tomorrow or the day after.
Today the consideration is just how real the pre-market climb is and how much staying power it has. No doubt the Dow Chemical news adds fuel to whatever nascent buying there has been lately.
As it would turn out there was no staying power, but the market recovered most of its early losses. Ib fact, the broad market did much better than the narrow DJIA and was up for the day.
With the start of the February cycle and already having this week’s option expirations populated, as well as some for the following week, the goal will be to continue that diversification, where possible.
At about 40% in cash, I’m again willing to get down to the 25% level, but not too likely to jump in on a strong open for the week and more likely to want to stick to lower volatility names, although some of the earnings trades do look a little tempting.
For now, though, the focus is still on reasonable safety, premiums and dividends while waiting for some sign of direction that has been slow in coming since the start of the New Year.
Unfortunately, today wasn’t the kind of day to easily identify many prospects. With a trade shortened week the premiums were already 20% lower and volatility went down even further today, taking premiums with them.
As much as I wanted to grab some more dividends, I just couldn’t justify those trades today. The same applies to those positions reporting earnings after today’s closing bell or before trading tomorrow. In those cases, however, the premiums were good, but I don’t like making the trades when those stocks are moving higher.
On the other hand, as some prices did fall today, other potential opportunities may be creating themselves, such as Starbucks, which was downgraded in advance of earnings Thursday afternoon and has already fallen about 7% in the past week.
Tomorrow is another day.
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