Jul192014

Weekend Update – July 20, 2014

Weekend Update Comment

While I don’t necessarily believe that space aliens will descend upon us with laser rays blazing, there’s reason to increasingly believe that possibility as we learn more and more about the existence of conditions elsewhere in the universe that may be compatible with sustaining life.

Still, even with that knowledge, I don’t let it control my life and quite frankly will probably never do anything that in any way is impacted by the thought of an encounter with an alien.

The principle reason for not elevating the alarm level is that there is no point in history to serve as an example. The pattern of life on earth has been so far devoid of such occurrences, as best we know. Right now, that’s good enough for me.

However, I just don’t completely discount the possibility, because I believe that it’s of a very low probability. Besides, the vaporization process would be so swift that there would be no time for remorse or regrets. At least that’s what I expect.

By the same token I don’t expect a complete meltdown in the market, even though I know it has and can, likely occur again. Despite its probability of occurrence and my belief of that probability, I’m not really prepared for one if it were to occur, even with the extraordinarily low cost of portfolio protection. The chances of a complete meltdown, as we know, is probably more likely to occur in the near term than the prospect of laser waving aliens in our lifetimes.

For all practical purposes one is a real probability and the other isn’t, yet they aren’t necessarily placed into different risk categories at the moment.

This week’s events, however, served as a reminder that the unexpected should always be expected. With the nice rebound on Friday from Thursday’s news of the tragic downing of the civilian Malaysian airplane, the lesson may be lost, however.

One thing that we seem to have forgotten how to do in the past 5 years is to expect the unexpected. Instead our expectations have been fueled by the relentless climb higher and a feeling of invincibility. To a large degree that feeling has been justified as every attempt to fight back against the gains has been stymied in quick and due course.

I probably wasn’t alone in having that invincible feeling way back in 2007. The vaporization process was fairly swift then, as well.

Even when faced with challenges that in the past would have sent markets tumbling, such as international conflict, we haven’t seen the application of age old adages such as “do not stay long going into a weekend of uncertainty.” This Friday’s market rebound was another example in a long string of uncertainty being expected to not lead to the unexpected.

In essence with the certainty of an ever climbing market having become the new reality there’s been very little reason to exercise caution, or at least to be prepared to act in a cautious manner in the expectation that perhaps the unexpected will occur.

Our minds are wired to like and identify patterns. That’s certainly the strategic basis for stock trading for many. Predictability brings a degree of comfort, but too much comfort brings complacency. The prevailing pattern simply argues against the unexpected, so we have discounted its probability and to a large degree its possibility.

While we may be correct in discounting complete market meltdowns, as their occurrence is still relatively uncommon, that complacency has us discounting intermediate sized moves that can easily come from the unexpected. The world is an increasingly complex and inter-connected place and as seen in the past week there needn’t be advanced warning signs for any of an infinite number of unexpected events to occur.

We did get lucky this past week, but we probably expected the luck to continue if the unexpected did strike. What would really be unexpected would be to draw a lesson from our fragility standing near market highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. With many companies reporting earnings this coming week a companion article, “Taking a Gamble with Earnings,” explores some additional potential trades.

As Thursday’s trading was coming to its close at the lows of the session more and more stocks were beginning to return to what seemed to be more reasonable trading levels.

The problem, of course, is dealing with the unexpected and trying to predict what comes next when there are really no data points to characterize what we’ve seen. Someday when we look back at these events and the market impact we may see a pattern, but at the moment the question will be “which pattern?” Is it one that’s simply a blip and short-lived as the event itself is self-limiting or is the pattern consistent with the beginning stages of what is to become an ongoing and escalating series of events that serve to erode confidence and place continuing strains on the market?

In other words, did we just witness a typical over-reaction and subsequent rebound or are we ready to witness a correction?

I think its the former, but it opens the possibility of additional incidents and escalation of hostilities in a part of the world that is far more meaningful to the world’s economies than unheralded internecine conflicts occurring in so many other places.

Interestingly, with that kind of backdrop, this week, while we begin to sort out what the short term holds, “Momentum” kind of stocks, particularly those with little to no international exposure in the hotbed areas, may be more conservative choices than the more Traditional selections.

While I like British Petroleum (BP), General Electric (GE) and Deere (DE) this week, predominantly due to their recent price drops, there is certainly reason to be wary of their exposure to parts of the world in conflict.

British Petroleum certainly has known interests in Russia and could be at unique risk, however, I believe that we will be seeing a lesser chest thumping Russia in the near term as there is some reason to believe that existing sanctions and perhaps expanded ones are beginning to get attention at the highest levels. Above all, pragmatism would dictate not injuring the source of hard currency.

I’ve been waiting a while to re-purchase shares of British Petroleum and certainly welcome any opportunity, even if still at a price higher than my last entry. With earnings scheduled to be reported July 29, 2014 and a healthy dividend sometime during the August 2014 option cycle there may be opportunities over the coming weeks with these shares to generate ongoing income.

General Electric reported its earnings this past Friday and also announced the impending IPO of its consumer finance business. The market was unimpressed on both counts.

I haven’t owned shares of General Electric with the frequency that it deserved. With a generous and increasing dividend, price stability, low beta and decent option premiums, it certainly has had the appeal for ownership, perhaps even using longer term option contracts to better  lock in some of those dividends. While it has significant international exposure the recent price weakness makes entry a little less risky, but even with the quality and size of General Electric unexpected bumpy rides can be possible when uncontrollable events create investor fear.

Deere is simply finally down to the price level that in the past was my upper range for purchase. With Caterpillar (CAT) reporting earnings later this week and trading near its 52 week high, there is room on the downside, as well as some trickle down to Deere shares. However, with Joy Global’s (JOY) recent performance, my anticipation is that Caterpillar’s Chinese related revenues will be enough to satisfy traders and offer some protection to Deere, as well.

On the Momentum side of the equation this week are Best Buy (BBY), Las Vegas Sands (LVS) and YUM Brands (YUM).

While Las Vegas Sands and YUM Brands certainly have international exposure, at the moment if you had to choose where to place your overseas bets, China may be relatively insulated from the unexpected elsewhere in the world.

Both companies are coming off weak earnings reports and the markets reacted accordingly. Both, however, have been very resilient to declines and finding substantive support levels in the past. With some shares of Las Vegas Sands recently assigned at current levels I would look for opportunity to re-purchase them. It’s volatility offers generous option premiums and the availability of expanded weekly options makes it easier to consider rollover opportunities in the event of unexpected price drops in order to wait out any price rebound, which has been the expected pattern.

YUM Brands is, like Deere, finally approaching the upper range of where I have purchased shares in the past. While I would like to see them even lower, I think that due to its dependence on the Chinese economy and market it may be a relative out-performer in the event of internationally induced market weakness.

Best Buy, unlike YUM Brands and Las Vegas Sands, has recently been on an upward price trajectory. I liked it much better when it was trading in the $26 range, but I believe it still has further upside potential in its slow climb back after unexpectedly bad earnings news 6 months ago. It too has an attractive option premium and a dividend and despite its recent price climb higher has come down nearly 5% in the past two weeks.

I have never purchased shares of Pandora (P) before, but love its product. At the moment I don’t particularly have any great desire to own shares, but Pandora does report earnings this week and is notable for its 10.8% implied price move. In the meantime a 1% ROI can be achieved at a strike price that is 16.4% below the current price. Those are the kind of characteristics that I like to see when considering what may otherwise be a risk laden trade.

Pandora has certainly shown itself capable of making very large earnings related moves and it is also certainly in the cross hairs of other and bigger players, such as Apple (AAPL) and Google (GOOG). However, even a scathing critic, TheStreet’s Rocco Pendola, has recently commented that its crushing defeat at the hands of those behemoths is not guaranteed.

Expected, maybe, but not guaranteed.

Facebook (FB) is also reporting earnings this coming week and in the two years that it has done so has predominantly surprised to the upside as it has quickly lived up to its vow to monetize its mobile strategy.

With an implied price move of 7.6% the strike level necessary to generate a 1% ROI through the sale of puts is 8.7% below Friday’s closing price. While shares can certainly make a move much larger than what is expected by the option market, in the event of an adverse move Facebook has some qualities that makes it an easier put option position to manage in the effort to avoid assignment.

It trades expanded weekly options and it does so with liquidity and volume, thereby having relatively narrow bid and ask spreads, even for deep in the money options.

Sooner or later, though, the expectation must be that earnings expectations won’t be met. I wouldn’t discount that possibility, although I think the options market may have done so a bit, so in this case I would be more inclined to consider the sale of puts after earnings, if share price drops on a disappointing report.

Finally, Apple reports earnings this week. It doesn’t really fulfill the criteria that I used when considering the sale of puts prior to earnings, in that it doesn’t appear that a 1% ROI can be achieved at a strike level outside of the range defined by the option market when calculating the “implied move.”

It’s probably useless trying to speculate on sales numbers or guidance. Based on its usual earnings related responses in the past, you would be justified in believing that the market had not expected  the news. However, this quarter the implied move is on the small side, at only 4.5%, suggesting that not much in the way of a surprise is expected next week.

With the current option pricing, the sale of Apple puts doesn’t meet my criteria, but I would again be interested in considering either the sale of puts after earnings, if the market’s response is negative or the outright purchase of shares and sale of calls, in anticipation of an ex-dividend date coming up in early August.

Sometimes it’s just easier dealing with the expected.

Traditional Stocks:  British Petroleum, Deere, General Electric

Momentum: Best Buy, Las Vegas Sands, YUM Brands

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (7/22 PM), Facebook (7/23 PM), Pandora (P)

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.

Jul182014

Taking a Gamble with Earnings

Daily Market Update Comment

The coming week stands to be a busy one as about 150 of the S&P 500 stocks will be reporting their quarterly earnings.

While earnings had gotten off to a good start last week with a strong showing from those in the financial sector, the market’s initial optimism was tempered a bit during the first day Janet Yellen’s Humphrey-Hawkins testimony and was sent into a pall with news of the tragic downing of a Malaysian civilian plan over the disputed Ukraine – Russian border area.

Regardless of the direction a stock’s price takes upon the earnings parade that also includes forward guidance there is often opportunity to profit from either the expected or unexpected news that’s delivered.

Whenever I ponder whether an earnings related trade is worth consideration I let the option market’s measure of the “implied price move” serve to determine whether there is a satisfactory risk-reward proposition. That calculation provides a price range in which projected price movements are thought to be likely.

If selling options, whether as part of a covered call strategy or through the sale of puts, there may be opportunity to achieve an acceptable premium even though if it represents a share price outside of the bounds set by the option market. Of course, that does depend to some degree on your own definition of “acceptable” and what you believe to be the appropriate level of risk to accompany that reward.

This coming week there appears to be a number of stocks that may warrant some attention as the reward may be well suited to the risk for some, as premiums tend to be heightened before known events, such as earnings.

A unifying theme for stocks that satisfy my criteria of offering a 1% or greater premium for a weekly option at a strike price outside of the boundary defined by the implied move calculation is underlying volatility. While already heightened due to impending earnings release and the uncertainty that accompanies the event, stocks that typically satisfy the criteria I’ve selected are already quite volatile.

While the implied volatilities may sometimes appear to be high, they are often consistent with past history and such moves are certainly within the realm of probability. That knowledge should serve as a warning that the unthinkable can, and does, happen.

While individuals can set their own risk-reward parameters, I’m very satisfied with a weekly 1% ROI.  The other part of the equation, the risk, is less quantitative. It is merely a question of whether the necessary strike level to achieve the reward is above or below the lower boundary defined by the stock’s implied move. 

I prefer to be below that lower boundary.

Among the companies that I am considering this coming week are Apple (AAPL), Cliffs Natural Resources (CLF), Comcast (CMCSA), Chipotle Mexican Grill (CMG), Facebook (FB), Freeport McMoRan (FCX), Intuitive Surgical (ISRG), Microsoft (MSFT), Pandora (P) and VMWare (VMW).

The basis for making any of these trades is entirely predicated upon what may be an inefficiency between the option premiums and the implied price movement. I give no consideration to fundamental nor technical issues and would prefer not to be in a position to take ownership of shares in the event of an adverse price move.

My preference when selling put contracts is to do so when shares have already been falling in price in advance of earnings. Given the flourish with which this past week ended that is a bit more difficult, as a number of the shares listed had sizable gains in the session, recovering from the previous day’s drops.

While I would prefer not to take ownership of shares, the investor must be prepared to do so or to attempt to manage the options contract, such as rolling it forward, if assignment appears inevitable.

During periods of low volatility it may sometimes be difficult to do so and achieve a meaningful additional premium without going out further in time than you may have envisioned, however.

The table above may be used as a guide for determining which of these selected companies meets risk-reward parameters. Re-assessments need to be made as prices and, therefore, strike prices and their premiums may change. Additionally, the target ROI may warrant being changed as time erodes. For example, if the trade is executed with only 4 days of time remaining on the contract the 1% ROI may find its equivalent in a 0.8% return.

While the list can be used prospectively there may also be occasion to consider put sales following earnings in those cases where shares have reacted in an extremely negative fashion to earnings or to guidance. If you believe the response was an over-reaction to the news there may then be opportunity to sell put options to take advantage of the negative sentiment that may be reflected in option premiums.

In such a case the sale of a put is a bullish sentiment and there may be opportunity to make that expression a profitable one as the over-reaction faces its own correction. My recent observation, however, is that it seems to be taking longer and longer to see some stocks mount meaningful recoveries after earnings disappointments, which I interpret as a bearish indicator for the market as a whole, as risk aversion is a priority.

Recently, I’ve spent some considerable time in managing some positions that had greater than anticipated price moves, including taking assignment and then managing the  position through the sale of call options.

Ultimately, regardless of the timing of an earnings related trade there is always opportunity when large price movements are anticipated, especially if those worst and best case scenarios aren’t realized.

Best of all, if the extreme scenarios are realized a nimble trader may have opportunity to create even more opportunities and allow the position to accumulate returns while doing so.

 

Jul42014

Weekend Update – July 6, 2014

Weekend Update Comment

You never really know what kind of surprises the market will bring on any given day. I’ve long given up trying to use rational thought processes to try and divine what is going to happen on any given day. It’s far too humbling of an experience to continually make such attempts.

Uncertainty may be compounded a little when we all know that low trading volume has a way of exaggerating things. With an extra long holiday coming up and many traders likely to be heading up to the Hamptons to really begin the summer, a three and half day trading week wasn’t the sort of thing that was going to generate lots of trading frenzy, although it could easily create lots of excitement and moves.

So when two big events occur in such a short time span, both of which seem to inspire optimism, as long as you’re not a bond holder, you can guess a plausible outcome. That’s especially so because lately the market hasn’t been in a "good/bad news is bad/good news" kind of mentality

In what was described as "the most significant speech yet in her still young Federal Reserve Chairmanship," Yellen re-affirmed he commitment to keep interest rates at low levels even in the face of bubbles. She made it clear that in her opinion higher interest rates was not the answer to dealing with financial excesses.

If you happen to be someone who invests in stocks, rather than bonds, could you be given any better gift, other than perhaps the same gift that Yellen gave just two weeks earlier during her post – FOMC press conference?

That gift didn’t have too much staying power and it’s unclear whether a few days off in celebration of Independence Day will makes us forget the most recent gift, but it’s good to have important friends who are either directly or indirectly looking out for your financial well-being.

When seeking to try and understand why stocks continue to perform so well, one concept that is repeatedly mentioned is that it is simply the best of alternatives at the moment. If you believe that to be the case, you certainly believe it even more after this week, especially when realizing that interest rates are likely to remain low even in the face of inflationary pressures.

Borrowing from an alternate investment class credo, it seems clear that the strategy should be simply stated as "Stocks, stocks, stocks."

As if there were any doubts about that belief, the following day came the release of the monthly Employment Situation Report and it lived up to and exceeded expectations.

So it appears that despite a significant revision of GDP indicating a horrible slowdown in the first quarter, the nation’s employers just keep hiring and the unemployment rate is now down to its lowest point since September 2008, which wasn’t a very good time if you were an equity investor.

While the "U-6 Unemployment Rate," which is sometimes referred to as the "real unemployment rate" is almost double that of the more commonly reported U-3, no one seems to care about that version of reality. As in "Animal House," when you’re on a roll you go with it.

More people working should translate into more discretionary spending, more tax revenues and less government spending on social and entitlement programs. That all sounds great for stocks unless you buy into the notion that such events were long ago discounted by a forward looking market.

However, normally that sort of economic growth and heat should start the process of worrying  about a rising interest rate environment, but that seems to be off the table for the near future.

Thank you, Janet Yellen.

Of course, with the market propelling itself beyond the 17000 level for the first time and closing the week on strength, what now seems like an age old problem just keeps persisting. That is, where do you find stock bargains?

I’m afraid the answer is that "you don’t," other than perhaps in hindsight.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.

Among my many faults are that I tend to be optimistic.

I don’t say that as many job applicants do in trying to turn the question about their greatest weakness into a strength in an effort to blow smoke in their prospective employer’s face.

That optimism, however, is more of a long term trait, as I’m always pessimistic in the short term. That seems consistent with someone who sells calls, especially of the short term variety. However, part of the problem is that my optimism often means that I purchase stocks too early on the heels of either bad news or performance in the belief that resurrection is at hand.

Most recently Coach (COH) has been a great example of that inappropriate optimism. Having owned shares 20 times in less than two years those purchases have frequently been made following earnings related disappointments and up until the most recent such disappointment, I haven’t found myself displaying a similar emotion. I’ve usually been pretty happy about the decision to enter into positions, although, in hindsight they were frequently initiated too early and I could have avoided some gastric erosion.

However, this time has been different in that even after an initially large price drop, the kind that in the past would have rebounded, shares just kept going lower. But also different is that the bad news didn’t end with earnings this time around.

As with another recent recommendation, Whole Foods (WFM), I believe that meaningful support has been displayed and now begins the time to start whittling down the paper losses through the addition of shares  or opening a new position. Despite what will certainly be years of ongoing competition with Michael Kors (KORS) and others in vying for the customer loyalty, Coach has dumped lots of bad news into a single quarter and is poised to begin its rebound along with a recovering retail sector.

While not  in retail, Mosaic (MOS) is another company that I’ve spent a year trying to whittle down the paper losses following dissolution of the potash cartel that no one ever knew had existed. In that time nine additional rounds of ownership have wiped out the losses, so now it’s time to  make some money. 

Shares have had some difficulty at the $50 level and recently have again fallen below. As with Coach, dividends and option premiums make it easier to exercise some patience, but they also can make it a compelling reason to initiate or add to positions. If adding at this level I would be very happy to see shares continue to trade in its narrow range and wouldn’t mind the opportunity to continually rollover option contracts as has been the case in the past, helping to erase large paper losses.

Also similar to Coach, in that I believe that all of the bad news and investor disbelief has been exhausted, is Darden Restaurants (DRI). There’s probably not much need to re-hash some of the dysfunction and what appears to be pure self-interest on the part of its CEO that has helped to keep its assets undervalued. However, at its current level I believe that there is room for share appreciation and a good time to start a position is often in advance of its ex-dividend date and nearly 5% dividend. 

While Darden’s payout ratio is well above the average for S&P 500 stocks, there isn’t much concern about its ability to maintain the payouts. With only monthly options available and a reporting earnings late in the upcoming season, I would consider the use of August 2014 options, rather than the more near term monthly cycle.

Also only offering monthly options, Transocean (RIG) has been slowly building off of its recent lows, but is having difficulty breaking through the $45 level. With recent pressure on refiners as a result of a Department of Commerce decision regarding exports there may be reason to believe that there would be additional incentive to bring supply to market for export. While clearly a long term process there may be advantage to being an early believer. Transocean, which I have now owned 14 times in two years also offers a very generous dividend.

As long as in the process of tabulating the number of individual rounds of ownership, Dow Chemical (DOW) comes to mind, with 18 such positions over the past two years. The most recent was added just a few weeks ago in order to capture its dividend, but shares then went down in sympathy with DuPont (DD) as it delivered some unexpectedly bad news regarding its seed sales. Showing some recovery to close the week, Dow Chemical is an example of a stock that simply needs to have  are-set of expectations in terms of what may represent a fair price. Sometimes waiting for shares to return to your notions of fairness may be an exercise in futility. While still high in my estimation based on past experience, I continue to look at shares as a relatively safe way to generate option income, dividends and share profits.

Microsoft (MSFT) is another obvious example of one of the many stocks that are at or near their highs. In that kind of universe you either have to adjust your baselines or look for those least susceptible to systemic failure. That is, of course, in the assumption that you have to be an active participant in the first place.

Since I believe that some portion of the portfolio always has to be actively participating, it’s clear that the baseline has to be raised. Currently woefully under-invested in technology, Microsoft appears to at least have relative immunity to the kind of systemic failure that should never be fully dismissed. It too offers that nice combination of option premiums and dividend to offset any potential short term disappointment.

Family Dollar Stores (FDO) reports earnings this week and must be getting tired of always being referred to as the weakest of the dollar stores. It may also already be tired of being in the cross hairs of Carl Icahn, but investors likely have no complaint regarding the immediate and substantial boost in share price when Icahn announced his stake in the company.

Shares saw some weakness as the previous week the potential buyout suitor, Dollar General (DG), considered to be the best in the class, saw its CEO announce his impending 2015 retirement. That was immediately interpreted as a delay in any buyout, at the very least and shares of both companies tumbled. While that presented an opportunity to purchase Dollar General, Family Dollar Stores are still a bit off of their Icahn induced highs of just a few weeks ago and is now facing earnings this coming week.

The option market is implying a relatively small 4.4% price move and it doesn’t quite fulfill my objective of tring to identify a position offering a weekly 1% return for a strike level outside of the implied price range. In this case, however, I would be more inclined to consider a sale of puts after earnings if the response to the report drives shares down sharply. While that may lead to susceptibility of repeating the recent experience with Coach, Carl Icahn, like Janet Yellen is a good friend to have on your side.

Finally, among the topics of the past week were the question of corporate responsibility as it comes to divulging news of the changing health status of key individuals. With the news that Jamie Dimon, Chairman and CEO of JP Morgan Chase (JPM), had been diagnosed with curable throat cancer, the question was rekindled. Fortunately, however, Dimon spared us any supposition regarding the cause of his cancer, perhaps having learned from Michael Douglas that we may not want to know such details.

While hoping for a swift and full recovery many recall when Apple (AAPL) shares briefly plunged when news of Steve Jobs’ illness was finally made public in 2009 and he took a leave of absence, opening the door for Tim Cook’s second seat at the helm of the company.

JP Morgan’s shares went down sharply on the report of Dimon’s health news on a day that the financials did quite well. To his and JP Morgan’s credit, the news, which I believe should be divulged if substantive, should not have further impact unless it changes due to some unfortunate deterioration in Dimon’s health or unexpected change of leadership.

In advance of earnings in two weeks I think at its current price JP Morgan shares are reasonably priced and in a continuing low interest rate environment and with increased regulatory safeguards should be much more protected form its own self than in past years. WHether as a short term or longer term position, I think its shares should be considered as a cornerstone of portfolios, although I wish that I had owned it more often than I have, despite 18 ventures in the past two years.

Hopefully, with Jamie Dimon continuing at the helm and in good health there will be many more opportunities to do so and revel in the process with Janet Yellen providing all the party favors we’ll need.

 

Traditional Stocks: Dow Chemical, JP Morgan Chase, Microsoft, Transocean

Momentum: Coach, Mosaic

Double Dip Dividend: Darden

Premiums Enhanced by Earnings: Family Dollar Stores

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.

May312014

Weekend Update – June 1, 2014

Weekend Update Comment

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend this week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 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.

May102014

Weekend Update – May 11, 2014

Weekend Update Comment

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

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.

May32014

Weekend Update – May 4, 2014

Week in Review Comment

The instant the Employment Situation Report was released and news of the creation of 288,000 new jobs was known, the spin and the interpretations started like wild.

Even partisans have to notice how detached they and their counterparts are from a true grasp of reality as they contrive ways to take credit or lay blame without regard to truth, in the expectation that no one will notice.

Whenever substantive economic news is released you can be certain of the immediate race to blanket the media with a version of the "truth" and talking points to reinforce one side’s continuing infallibility over the other.

Never before has the "participation rate" received so much attention as those seeking to downplay the robust numbers found their voice. Others focused on having cake and eating it too, while pointing to increased jobs and increasing insurance enrollments under the Affordable Care Act.

It’s always the same and thrives in a world where classic comments like "I was for … before I was against it," barely get noticed and flip-flops are never considered as anything other than recreational footwear.

For those paying attention those flip-flops have been increasingly frequent in the markets as "risk off" and "risk on" are again concepts in vogue. They alternate with one another for investor favor on a very regular basis as there’s little indication of direction, other than the expectation by some that the relentless move higher will simply continue.

With better numbers than expected the initial positive reaction from the market quickly gave way to  the interpretation of their meaning with regard to the Federal Reserve’s Qualitative Easing taper and the forward momentum was quickly lost. As the day progressed it was clear that the thought process of the past, that "good news is bad news" and bad news will make us wealthy, was returning.

More importantly, however, in helping to shape up the day was the fact that it was a Friday. Just as Tuedays are once again pre-ordained to be market gainers, so too are Fridays recently consigned to the loss camp.

Over the past two months you could be equally certain that the final trading day of the week was most likely a Friday and that the trading week would end with renewed concerns of some escalating conflict involving Russia. Why things seem to stay quiet during the week and then come to a head on Fridays is somewhat of a mystery, but that’s been the clear trend since the onset on the crisis in Crimea.

Amazingly, yet another week that was fairly quiet during the first four trading days saw a flare up of tensions overseas on Friday and again had an impact on the markets, taking some luster off what were otherwise predominantly positive weeks. The key is that it has only been the luster, thus far, as the market hasn’t been taken down to its bare, perhaps rusting metal base.

So powerful has this trend been that another well established trend is flailing by comparison. After an impressive run of nearly two years where the markets were statistically significantly more likely to have a higher move on the date of the release of the Employment Situation Report, this Friday marked the second consecutive month where that wasn’t the case, although the pattern of the entire week of the report release being positive continued.

While economic reports are released, the FOMC announces and Russia foments, earnings are being released. Thus far, there hasn’t been very much to suggest that there is a growing economy, yet we keep reaching new market highs. The recent GDP report didn’t add anything to that belief, either, although as the ever optimistic like to point out, "it is a backward looking measure," as if forward looking measures have greater validity than that which was actually measured, rather than fantasized about.

We’ve seen this scenario before. While there are signs of  tiring market the retreats to safety, such as utilities or consumer staples hasn’t lasted very long and risk is re-embraced after only the briefest of absences. While the most risky of all have been exhibiting some bubble-like behavior that brings back memories of days past and those memories aren’t necessarily good ones.

While the uncertainty continues, to me it also continues to be surprising of the relative confidence that exists that saw this Friday close with only  a modest loss. While the precious metals market was demonstrating some nervousness the equity markets thought it safe to go home for the weekend and discounted the likelihood of a meltdown in overseas decorum, despite the signs that it was already occurring.

In the past, that would have been unusual, but now it is just more of the same, as nothing can stop the relentless march higher.

We’ve all heard that before, too.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.

While I’m not thrilled about the prospects about buying Apple (AAPL) shares after their significant run higher fueled by the announcement of a 7 to 1 split and an 8% increase in the dividend, I do like its reasonably predictable pattern of behavior in its peri-ex-dividend period. While not a certainty, that behavior tends to see price increasing going into the ex-dividend date and then shortly thereafter. With that ex-dividend date this week I would like to consider a purchase and hopefully a quick exit from the position.

While many are of the belief that Apple shares will continue their appreciation after the split, I think those waiting for the split are likely to be disappointed as the money will have been made by those taking some profits by selling their appreciated shares to those clamoring for a piece of the pie.

Lately, pharmaceutical companies are hot. Imagine being so confident that you would consider a $100 billion buyout offer to be insufficient. Yet, while they are in play there are also concerns about even more regulatory pressure, but this time over sky high pricing for potentially life saving drugs.

Bristol Myers Squibb (BMY) straddles the worlds of "big pharma" and bio-pharma and its shares have found a nice home in this price range for the past 6 months. With earnings having been reported I think this is a good time to enter or add shares, not just for the option premium, but also for share appreciation as the sector is suddenly of interest. 

MetLife (MET) also just reported earnings and is currently trading a little above the mid-point of its recent comfortable range. It has actually held up nicely while interest rates have fallen and the 10 Year was testing the 2.5% level. MetLife would have been expected to also lose some luster in a falling rate environment, but it has shown very nice resilience. In addition to its usually attractive option premium shares are ex-dividend this week, compounding its lure.

Starbucks (SBUX) also is ex-dividend this week and I’ve resigned myself over the past month that shares won’t be returning, hopefully, to the levels that I previously thought represented fair pricing. I’ve only owned 3 lots of shares in 2014, but each time I hear Howard Schultz speak the more inspired I get regarding his vision for the company that goes well beyond ingestibles. It has become one of those companies upon which I like to use out of the money call options when adding shares, as I think there is always room for its short term appreciation.

eBay (EBAY) is one of those companies that so many people love to disparage. Of course it’s decision to repatriate foreign cash this week and pay taxes is somewhat puzzling, although perhaps should be cheered as being patriotic, it evokes policy discussion, particularly as other companies seek tax inversion benefits by moving offshore.

Certainly Carl Icahn can’t be terribly pleased with what eBay is doing, as he likely interprets the decision as a squandering of his billions, so I expect things to heat up at eBay. However, even without the tax issue and even without Carl Icahn as part of the equation, eBay has been as reliant of a covered option play as can be found and with some patience can be a very reliable partner in the creation of an income stream. The only thing that would make its shares more appealing to me would be the initiation of a dividend, so I hope Carl Icahn is reading.

Chesapeake Energy (CHK), speaking of Carl Icahn, reports earnings this week. It has long been one of my very favorite covered option trades, but my last lot was assigned more than $2 ago. As opposed to many trades that I like to make when earnings are announced and which are done through the sale of put contracts, with no desire to own shares, I wouldn’t mind ownership of shares.

As the week begins its trading it will simply be a question of whether a covered call position or the sale of puts provides a better rate of return and future prospects for continuing generation of income or quick closure. At the moment I’m more inclined to consider the sale of puts, however the initial market sentiment may shift my own, especially if shares open and stay higher.

Also reporting earnings this week is Nu Skin (NUS). Unlike Chesapeake, and much more like Herbalife (HLF), I’m not terribly interested in owning shares. NuSkin last reported earnings just 2 months ago after a delay of about a month in reporting its previous earnings. That;s never a good thing. In addition, its business practices are also occasionally called into question even by governments, as it has significant interests in China, which has alleged that the business ay be a pyramid scheme.

NuSkin, for its part, has re-started its distributor recruitment after nearly 3 months of abeyance in China. WHile earnings may  adversely impacted, and its shares certainly dived after the initial news in January 2014, I believe that it is already baked into expectations. What I do expect is positive guidance, even though there’s possibly reason not to believe much from companies in those kind of business. While I can’t make a compelling case for owning shares, there may be a case for selling puts prior to earnings or for the more cautious, doing so after earnings if there is a plunge in reaction to the report.

GameStop (GME) reports earnings later this month. Since January 2014 its chart looks very similar to NuSkin, which is not meant as a compliment. It is one of those companies that makes you wonder how it is that it still exists in this world of streaming data. it’s most recent challenge was news of Wal-Mart (WMT) getting into the used video game business in exchange for Wal-Mart vouchers. I sold puts at that time following the sharp drop in shares and happily saw the position quickly expire,as so often the initial response has little reason to  head in the same direction as cooler heads prevail.

With well known short interest that is always mentioned in the same breath as its name, GameStop had fully recovered from its Wal-Mart induced loss, but has recently faltered again. It appears to have some decent price support within about $3 of its current price and the kind of option premiums that could make that risk – reward proposition appealing for some, although May 22, 2014 earnings do add to the potential risk.

Finally, I was watching the action of JP Morgan (JPM) closely during the final hour of trading on Friday. That’s because I was expecting shares to be assigned, but a late decline in shares was threatening to see it dip below the $55.50 strike level. Ultimately shares closed at $55.58, but after the closing bell immediately slumped about a dollar lower as it announced the expectation that its trading revenues would drop 20% in the next quarter and that it had some exposure in the Russian market. 

Part of the covered call strategy that I like to employ is the serial or recurrent purchase of positions. Nothing seems to work better than having shares assigned and then buying them back at lower prices.

Those kinds of opportunities are always serendipitous and you certainly can’t take credit when they occur, but they do occur with reasonable frequency. Any further erosion in shares on Moinday morning may be a good opportunity to welcome shares back after a weekend apart.

Traditional Stocks: Bristol Myers Squibb, eBay, JP Morgan Chase

Momentum: GameStop

Double Dip Dividend: Apple (5/8) , MetLife (5/7), Starbucks (5/6)

Premiums Enhanced by Earnings: Chesapeake Energy (5/6 PM) , NuSkin (5/6 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.

Nov22013

Weekend Update – November 3, 2013

Daily Market Update

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 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.

Oct62013

Weekend Update – October 6, 2013

Weekend Update

This is the time of year that one can start having regrets about the way in which votes were cast in prior elections.

Season’s Misgivings

The sad likelihood, however, is that officials elected through the good graces of incredibly gerrymandered districts are not likely to ever believe that their homogeneous and single minded neighbors represent thoughts other than what the entire nation shares.

That’s where both parties can at least agree that is the truth about the other side.

Living in the Washington, DC area the impact of a federal government shutdown is perhaps much more immediately tangible than in a “geometric shape not observed in nature” congressional district elsewhere. However, there is no doubt that a shutdown has adverse effect on GDP and that impact is cumulative and wider spreading as the shutdown continues.

It’s unfortunate that elected officials seem to neither notice nor care about direct and indirect impact on individuals and financial institutions. In war that sort of thing is sanitized by referring to it as “collateral damage.” As long as it’s kept out of sight and in someone else’s congressional district it doesn’t really exist.

Pete Najarian put it in terms readily understandable, much more so than when some tried expressing the cost of a shutdown in terms of drag on quarterly GDP.

Of course, the real challenge awaits as we once again are faced with the prospect of having insufficient cash to pay debts and obligations. But for what it’s worth at least the rest of the world gets a much needed laugh and boost in national ego, while McGraw Hill Financial (MHFI) and others ponder the price of their calling it as they see it.

At the moment, that’s probably not what the economy needs, but in the perverse world we live in that may mean continued Federal Reserve intervention in Quantitative Easing. While “handouts” are decried by many who don’t see a detriment to a government shutdown, the Federal Reserve handout is one that they are inclined to accept, as long as it helps to fuel the markets.

However, as we are ready to enter into another earnings season this week many are mindful of the fairly lackluster previous earnings season that just ended. While the markets have recently been riding a wave of unexpected good news, such as no US intervention in Syria, continued Quantitative Easing and the disappearance of Lawrence Summers from the landscape, we are ripe for disappointment. We were spared any potential disappointment on Friday morning as the release of the monthly Employment Situation Report fell victim to someone being furloughed.

So what would be more appropriate than to re-introduce the concept of stock fundamentals, such as earnings, into the equation? During this past summer, when our elected officials were on vacation, that’s pretty much where we focused our attention as the world and the nation were largely quiet places. While no one is particularly effusive about what the current stream of reports will offer, a market that truly discounts the future already has its eyes set on the following earnings season that may begin to bear the brunt of any trickle down from a prolonged government shutdown.

At the moment, sitting on cash reserves, I am willing to recycle funds from shares that have been assigned this Friday (October 4, 2013), but am not willing to dip further into the pile until seeing some evidence of a bottoming to the current process that had the S&P 500 drop 2.7% since September 19, 2013 until Friday’s nice showing pared the loss down to 2%. But I need more evidence than a tepid one day respite, just as it will take more than a resolution to the current congressional impasse to believe that we wouldn’t be better served by an unelected algorithm.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I’m certain many people miss the days when a purchase of shares in Apple (AAPL) was a sure thing. While I like profits as much as the next person, I also enjoy the hunt and from that perspective I think that Apple shares are far more interesting now as we just passed the one year anniversary of having reached its peak price and tax related selling capitalizing on the loss will likely slow. Suddenly it’s becoming like many other stocks and financial engineering is beginning to play a role in attempts to enhance shareholder value.

Without passing judgment on the merits of the role of activist investors it doesn’t hurt to have additional factors that can support share price, particularly at times that the market itself may be facing weakness. Apple has increasingly been providing opportunities for short term gains as its price undulates with the tide that now includes more than just sales statistics and product releases. Capital gains or shares, an attractive dividend and generous option premiums make its ownership easier to consider at current prices. However, with earnings scheduled to be reported on October 22, 2013 I would likely focus on the sale of weekly option contracts as Apple is prone to large earnings related moves.

While Apple has done a reasonable job in price recovery over the past few months amid questions regarding whether its products were still as fashionable as they had been, Abercrombie and Fitch (ANF) hasn’t yet made that recovery from its most recent earnings report that saw a more than 20% price drop. As far as I know, and I don’t get out very much, talks of it no longer being the “cool” place to buy clothes aren’t the first item on people’s conversational agenda. The risk associated with ownership is always present but is subdued when earnings reports are still off in the distance, as they are currently. In the meantime, Abercrombie and Fitch always offers option premiums that help to reduce the stress associated with share ownership.

Ironically, the health care sector hasn’t be treating me terribly well of late, perhaps being whipsawed by the fighting on Capitol Hill over the Affordable Care Act and proposed taxes on medical devices. Additionally, a government shutdown conceivably slows the process whereby regulated products can be brought to the market. Abbott Labs (ABT), whose shares were recently assigned at $35 has subsequently dropped about 5% and will be going ex-dividend this week. Although the dividend isn’t quite as rich as some of the other major pharmaceutical companies after having completed a spin-off earlier in the year, I think the selling is done and overdone.

For me, a purchase of MetLife (MET) is nothing more than replacing shares that were just assigned after Friday’s opportune price surge and that have otherwise been a reliable creator of income streams from dividends and option premiums. At the current price levels MetLife has been an ideal covered call stock having come down in price in response to fears that in a reduced interest rate environment its own earnings will be reduced.

International Paper (IP) is an example of a covered call strategy gone wrong, as the last time I owned it was about a year ago having had shares assigned just prior to its decision to go on a sustained rise higher. While frequently cited by detractors as an argument against a covered option strategy, the reality is that such events don’t happen terribly often, nor does the investor have to eschew greed as share price is escalating or exercise perfect timing. to secure profits before they evaporate. I’ve waited quite a while for its share price to drop, but it is still far from where I last owned them. Still, the current price drop helps to restore the appeal.

Being levered to China or even being perceived as levered to the Chinese economy can either be an asset or a liability, depending on what questionable data is making the rounds at any given moment. Joy Global (JOY) is one of those companies that is heavily levered to China, but even when the macroeconomic news seems to be adverse the shares are still able to maintain itself within a comfortably defined trading range. With Friday’s strong close my shares were assigned, but I would like to re-establish a position, particularly at a price point below $52.50. If it stays true to form it will find that level sooner rather than later making it once again an appealing purchase target and source of option related income.

With the start of a new earnings season one stock that I’ve been longing to own again starts out the season. YUM Brands (YUM) is an always interesting stock to own due to how responsive it is to any news or rumors coming from China. Over the past year it’s been incredibly resilient to a wide range of reports that you would think were being released in an effort to conspire against share price. Food safety issues, poor drink selection during heat waves and Chinese economic slow down have all failed to keep the share price down. While the current price is near the top of its range I think that expectations have been set on the low side. In addition to reporting earnings this week shares also go ex-dividend the following day.

A little less exciting, certainly as compared to Abercrombie and Fitch is The Gap (GPS). In a universe of retailers going through violent price swings, The Gap has been an oasis of calm. It goes ex-dividend this week and if it can maintain that tight trading channel it would be an ideal purchase as part of a covered call strategy.

While The Gap isn’t terribly exciting, Molson Coors (TAP) and Williams Co. (WMB) are even less so. While I usually start thinking about either of them in the period preceding a dividend payment they have each found a price level that has offered some stability, thereby providing some additional appeal in the process that includes sale of near the money calls.

Finally, I have a little bit of a love-hate relationship with Mosaic (MOS). The hate part is only recent as shares that I’ve owned since May 2013 have fallen victim to the collapse of the potash cartel. In a “what have you done for me lately” kind of mentality that kind of performance makes me forget how profitable Mosaic had been as a covered call holding for about 5 years. However, the recent “love” part of the equation has come from the serial purchase of shares at these depressed levels and collecting premiums in alternation with their assignment. I have been following shares higher with such purchases as there is now some reason to believe that the cartel may not be left for dead.

Traditional Stocks: International Paper, Molson Coors, Williams Co.

Momentum Stocks: Apple, Joy Global, MetLife, Mosaic

Double Dip Dividend: Abbott Labs (ex-div 10/10), The Gap (ex-div 10/11), YUM Brands (ex-div 10/9)

Premiums Enhanced by Earnings: YUM Brands (10/8 PM)

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.

Sep142013

Weekend Update – September 15, 2013

Weekend Update

Month after month of seeing market gains finally came to an end in August. The streak had started in November 2012 and for those who are prone to remember oddities, we even had a string of 20 consecutive gaining Tuesdays during that span.

Of course we also eclipsed the 2007 Dow Jones and S&P 500 highs and subsequently did so on repeated occasions, all while “Chicken Littles” like me kept waiting for the correction that never came.

The small head fake correction that began near the end of May was barely a blip and was quickly erased as more new highs were established, but the trading patterns of August seemed to indicate that perhaps the rally was getting tired and the market not only began sputtering, but also lost ground as Syrian related tensions were in the air.

Anxious to see a modest correction so that I would finally have something constructive to do with the cash I had been raising, I wasn’t terribly happy with what would come in September, with the first seven trading days having seen gains.

Not only did they make gains, but there were three consecutive triple digit gains. Adding insult to injury was the root cause of those triple digit gains.

While avoiding the use of military force, at least in the near term, is somewhat comforting, the very idea that a Russian proposed plan could avert military action against Syria was about as implausible as anything that occurred in the 20th or 21st centuries, with the possible exception of the Russian President speaking directly to American citizens through an op-ed piece in the New York TImes (NYT).

Russian peace plan? Can those words even possibly all be in a single paragraph?

But with fear centered around uncertainty regarding military action against Syria temporarily tabled, the market ignored August and also ignored the historical nature of Septembers past. By Friday morning, just seconds after the opening bell, all of August’s losses had been recovered.

Somehow, I am neurologically incapable of saying “Thank you, Vladimir.”

Instead, the increasingly nervous part of me wonders what there is that awaits that will continue to send markets higher? Are there unseen catalysts or are there now more opportunities for disappointment, particularly if Russian efforts, inspired by an off the cuff remark by Secretary of State Kerry, prove to be inadequate?

I’ve been asking questions in a similar vein for months now, but the answer has always been in the affirmative, even if the catalysts weren’t always apparent.

Of course, now there’s also the question of the market’s reaction to the expected announcement of the nomination of Lawrence Summers as the next Federal Reserve Chairman. The rumor that such an announcement would come today was denied, but that should come as no surprise, as President Obama had his heart set on doing so by attaching a banner to a Tomahawk missile.

If Syria fails to deliver a market correction and neither fear of the “Taper” nor the nomination of Summers can do so, at least we will have Congress back and fully engaged so that a new round of budget crises can at least allow the market to bounce up and down, which is far more healthy for someone relying on a covered option strategy. If that happens, I can hold my head up high and point to a momentary drop lower and sat “See? That correction.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

I’ve only opened a limited number of new positions in the last few weeks and don’t anticipate seeing that pattern change this week, unless there is a substantive near term correction to last week’s price increases. Those increases, for example, are the reason why I have no Double Dip Dividend selections this coming week, as the risk of experiencing some price pullbacks outweighs the benefits of garnering option premiums and dividends. As it is, instead of the usual number of potential selections, this week’s list contains only 5 names.

Certainly a controversial place to begin looking in the new week is Apple (AAPL). I purchased shares last week following the large drop on Wednesday when disappointment began to settle in for varied reasons. The small recovery that I was expecting never really came, but instead of being disappointed by the inability to quickly close my position, I think that there is simply continued opportunity to pick up additional shares. However, as opposed to the rare instance of having purchased shares and not immediately having sold calls, I do plan to do so this time around if adding shares.

Apple, while not necessarily making significant changes to its product line is making significant changes to the way it conducts its business. From a trade-in program, to less expensive models, to not taking pre-orders on the upcoming iPhone 5S, to dividends and buybacks, they are shaking up their daily approach to existence on all fronts. From my vantage point the short term emphasis is that “cash is king” and that share price matters. I especially like Tim Cook’s philosophy that market share isn’t as important as having enough money to be in control of one’s destiny. The recent product announcements should see to it that the cash keeps pouring in and helps to secure that destiny.

Continuing with the controversial theme is Cliffs Natural Resources (CLF). I had written about the possibility of adding shares recently, but did not do so. Instead, I continued selling calls on a lower priced lot of shares to try and continue to offset substantial paper losses from older lots. That’s a slow process but I think at this current level the process can be speeded up by adding more shares. Highly levered to economic news from China does add to the risk of ownership, but Cliffs has been demonstrating some price stability at this level.

I may as well add to the controversy with Phillip Morris (PM). Whatever your opinions are about ownership of a company that directly results in countless premature deaths, it’s hard to overlook their move to increase the dividend and the reasonably narrow range in which shares trade. Combine those attributes with an appealing option premium and you have a combination that’s hard to resist and doesn’t even require nicotine to keep you hooked.

They say that there’s no such thing as bad publicity, although JP Morgan (JPM) may disagree. However, if you want to see the poster child for resilience you don’t have to look much further than this company. After an avalanche of bad news, having inherited the burden from Goldman Sachs (GS), JP Morgan has somehow been able to keep its share price respectably positioned. This week it announced plans to commit nearly $6 Billion toward legal defenses and compliance. In addition to an option premium that provides some comfort, shares will be ex-dividend during the October 2013 option cycle so I may consider using a longer term option sale and would actually welcome early assignment.

Finally, while earnings season is set to begin again in just a few weeks, Oracle (ORCL) is a laggard and reports this week. With the upcoming report the company will have had six months to make some changes, whether substantive or purely optical, to create a more positively received report. Following two successive negative reports that were not well received by the market, I think that its inconceivable that Larry Ellison would allow his name to be badly tarnished again by anything other than his own words and actions. No doubt that he is unhappy with share performance since that first disappointment.

While I usually like to consider earnings related trades on the basis of selling deep out of the money puts, Oracle may work equally well as an outright purchase and sale of calls. In the event of another price meltdown I would not go out of my way to greet Ellison if you see him in Lanai, although I don’t believe the police department was included with the sale of the island.

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

Premiums Enhanced by Earnings: Oracle (9/11 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate positions, add shares or sell puts in AAPL, CLF, JPM, ORCL and PM

Sep112013

I Bought Apple

Articles

There are some people that just love to take in wounded birds and believe that somehow that can nurse the poor wounded creature back to health. For some sainted few that is their “raison d’etre.”

I bought shares of Apple (AAPL) this morning after it was wounded by downgrades from Bank of America (BAC), UBS (UBS), Piper Jaffray (PJC) and Credit Suisse (CS).

You’re welcome, but I’m not saint. I certainly can’t be categorized as an “Apple lover.” Neither the products nor the shares have had consistent appeal for me, but the subjectivity is out of place when it comes to capitalizing on opportunity.

Clearly, this opportunity stems from the high profile downgrades. Such downgrades confirm for me that there is greater value placed on not missing out on potential gains than there is in protecting portfolios from disappointments.

Recent history has not given strong indication that Apple shares will rally after product launch events, particularly as the quality of the leaks regarding the “news” seem to get better and better. There are few, if any, upside moving surprises. In fact, one wouldn’t be terribly far off base to suggest that the sum total of predictions of what will be announced easily exceed the capability of squeezing all of the new options into a single device. As a result there is always bound to be someone leaving the party disappointed.

For those further expecting the announcement of new relationships, such as in China, there has to be some thought that the downside to disappointment may likely exceed the upside of what may already be partially built into the price.

Yet, protecting a client’s assets takes a back seat.

My basic understanding of math tells me that it’s more difficult to recover from a $5 loss than it is to find an opportunity to make $5 in place of the opportunity you missed.

But with a short-sighted view of what the future holds, analysts have created opportunity, just perhaps not for their clients.

I almost never buy shares without concomitant sale of option contracts, but in this case I listened to my own advice from just a few weeks ago when Carl Icahn entered into the picture.

In addition to now having a more favorable entry point to re-establish a position that was recently assigned, so too does Apple find itself in a better position to further implement its buy-back program. There’s no shortage of money still unspent in that program and there may be more added to the bucket.

No doubt this will be a topic of Icahn and Tim Cook’s upcoming dinner, which Icahn confirmed a few days ago would be this month.

But now that the product offerings are well known, they have no doubt been dissected by many who can extol or pan the virtues and relative value of the innovations. To attempt to analyze the advances incorporated into the iPhone 5c and 5s is somewhat meaningless with regard to short term investing, which is all I hope to ever do.

What I hope to do is turn shares into short term realized profit vehicles. For that reason I don’t dwell on the possibility that the fingerprint reader may be an entry way into mobile secure commerce solutions.

What I dwell on is how likely is Apple to withstand this onslaught and then I’m likely to sell call options into price strength, as I expect a bounce in shares, particularly as Syria is temporarily off the table.

Apple will continue being an incredible cash machine with these new devices. Argue about their price points as much as you want, argue about cannibalization, too. The reality will be that the phones will fly off the shelves and tie up the consumer base for another year or two. After all, it’s not just about selling product, it’s also about making certain that your consumer base is effectively barred from going to the competition without the burden of additional cost.

I’m still a product holdout, but the rest of my family isn’t, some of whom only joined the parade this week.

Scoff at the superficial changes, but Apple knows better than most others that bold colors will not only drive new sales. but will instantly help distinguish itself in the hands of one adolescent as another is watching.

While everyone enjoys talking about “the big picture,” today’s downgrades and market reaction have been anything but mindful of that more encompassing view.

This is what opportunities are made of, despite the fact that risk shares the same parent. Having been very critical of Apple over the past 15 months, and questioning why people had not taken profits before they evaporated, I’ve nonetheless found a number of opportunities over that time to re-establish short term positions. In the past the drivers of those decisions were predominantly based upon option premiums and dividends. This time, however, the catalyst is share appreciation as the market will realize that its immediate reaction was unwarranted.

Aug132013

Carl Icahn Spells the End of an Era at Apple

Daily Market Update

This afternoon came news via a simple 140 space statement that Carl Icahn currently had “a large position” in Apple (AAPL).

By all accounts his discussion with CEO Tim Cook were cordial. Icahn himself, in another 140 space blast referred to it as “nice,” and he anticipated speaking to Cook again shortly.

I currently own Apple shares that somewhat surprisingly weren’t assigned away from me last week in an effort to grab the dividend. Considering that shares were trading at about $465 prior to the ex-dividend and the strike price sold was $450, my expectation had been that assignment was a certainty. Especially since option premiums were no longer showing any time premium with such a deep in the money option.

But as many know when it comes to Apple stock, rational thought isn’t always a hallmark of ownership.

I still think back to a comment made to an earlier Seeking Alpha article I had written in May 2012, when Apple was trading at about $575

“I guess it’s hard to not have a certain bias towards a company that has turned $30,000 of your dollars into $600,000 and may if things go right turn it into a $1,000,000.”

I always wondered whether that individual had taken interim profits or whether subsequent to May 2012 had secured some profits as Apple dropped some 200 points. The fact that its author was a CPA wasn’t lost upon me.

At the time, I thought that an investing strategy of hoping to turn $30,000 into $1,000,000 was irrational, just as turning $600,000 into $1,00,00 was irrational.

What was abundantly clear, as I took a cynical view of Apple shares in repeated articles when analysts were calling for a $1,000 stock price was that emotion was at work among many investors. Part of the emotion was the fervent belief that Apple could only keep innovating and would always be an aspirational product with great margins.

However, one refrain that repeatedly was played was that Apple shares were destined to go much higher, based on an absurdly low price to earnings ratio.

The contention was that one the market starting placing a value on Apple shares more consistent with other technology stocks, Apple would soar far above its current level.

Of course, the seemingly rational analysis dismissed the fact that the market may in fact, have been rational in giving Apple a P/E in the 12 range, just like any well regarded retailer.

A retailer? Apple is a retailer and not a technology company? Granted, it is no longer “Apple Computer,” but why should Apple be considered anything but a technology company?

That’s where Carl Icahn comes in.

Despite his recent foray into Dell Computer (DELL), his history as an activist shareholder has not included many companies in the technology arena.

Icahn refers to Apple as being “undervalued” but he isn’t looking at a low P/E to buttress his opinion. He is looking at a continuing large cash position that he envisions as a means of expanding the already large share buyback, that to many has already been the source of Apple strength going from its near term lows to $450.

This is not a case of finding fault with leadership, this is not a case of someone seeking to prevent shareholders from being robbed blind in an insider buyout deal. Apple is very different from Dell in so many ways.

This is all about leveraging cash, without regard to product pipeline and without regard to product margins. This isn’t about cutting expenses or changing direction. It is as pure as you can get – it is about cash.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E. It’s time to face the fact that the stock market has been entirely rational in assigning Apple the P/E it has for these past years. It was not going to ever be considered a technology company again. It is a retailer with a narrow range of products which are bought at the whims of a fickle consumer.

While not terribly different from David Einhorn’s earlier attempt to wiggle cash out of the Apple coffers, Icahn is relentless and scrappy. What starts as perhaps a nice discussion can quickly go elsewhere.

While there is a quick pop in Apple shares in the aftermath of the announcement and while I anticipate shares to move even higher, this is the end for the Apple that you knew and loved. It wasn’t the death of Steve Jobs, but rather the indirect impact of his absence that spells the end, as Apple becomes like so many other companies simply nothing more than a vessel for someone that will have as limited interest as a pedestrian day trader.

While I’ve believed that Apple was an eminently good trading stock once in went down below the $450 level in February 2013, I think that in the very near term its suitability as a trade is even further enhanced, despite the large move higher this afternoon.

In fact, in the case of Apple, I would even consider the rare decision to purchase shares without immediate and concomitant sale of call options.

As long as Carl Icahn is on your side, you may as well consider him in the same vein as those who warn that you should “never fight the Fed,”  even if you believe Apple is too large for even Carl Icahn to take on. That’s because this is now also a new era of cooperative behavior (against Bill Ackman, at least), where the big boys are capable of joining forces these days and will do so like vultures when there’s cash to be had.

The only caveat is that it’s not likely that you’ll enjoy dreams of turning $30,000 into a $1,000,00 and so I would be all for taking profits wherever they present themselves.

 

Jul202013

Weekend Update – July 21, 2013

Weekend Update

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

May192013

Weekend Update – May 19, 2013

Weekend Update

Shades of 1999.

I’m not certain that I understand the chorus of those claiming that our current market reminds them of 1999.

Mind you, I’m as cautious, maybe much more so than the next guy and have been awaiting some kind of a correction for more than 2 months now, but I just don’t see the resemblance.

Much has also been made of the fact that the S&P 500 is now some 12% above its 200 Day Moving Average, which in the past has been an untenable position, other than back when sock puppets were ruling the markets. Back then that metric was breached for years.

Back in 1999 and the years preceding it, the catalyst was known as the “dot com boom” or “dot com bubble” or the “dot com bust,” depending on what point you entered. The catalyst was clear, perhaps best exemplified by the ubiquitous sock puppet and the short lived PSINet Stadium, back then home to the world Champion Baltimore Ravens. The Ravens survived, perhaps even thrived since then, while PSINet was a casualty of the excesses of the era. When it was all said and done you could stuff PSINet’s assets into a sock.

During the height of that era the catalyst was thought to be in endless supply. But in the current market, what is the catalyst? Most would agree that if anything could be identified it would likely be the Federal Reserve’s policy of Quantitative Easing.

But as last week’s rumor of its upcoming end and then an article suggesting that the Federal Reserve already has an exit plan, the catalyst is clearly not thought to be unending. Unless the economy is much worse than we all believe it to be the fuel will be depleted sooner rather than later.

Now if you’re really trying to find a year comparable to this one, look no further than 1995, when the market ended the year 34% higher and never even had anything more than a 2% correction.

If llke me, and you’re selling covered options; let’s hope not.

For me, this Friday marked the end of the May 2013 option cycle. As I had been cautious since the end of February and transitioned into more monthly option contract sales, I am faced with a large number of assignments. Considering that the market has essentially been following a straight line higher having so many assignments isn’t the best of all worlds.

While I now find myself with lots of available cash the prevailing feeling that I have is that there is a need to protect those assets more than before in anticipation of some kind of correction, or at least an opportunity to discover some temporary bargains.

This week I have more than the usual number of potential new positions, however, I’m unlikely to commit wholeheartedly to their purchase, as I would like to maintain about a 40% cash position by the end of next week. I’m also more likely to continue looking at monthly option sales rather than the weekly contracts.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, although the height of earnings season has passed there may still be some more opportunity to sell well out of the money puts prior to earnings on some reasonably high profile names..

There’s no doubt that the tone for the week was changed by the down to earth utterances of David Tepper, founder of the Appaloosa Hedge Fund. He has a long term enviable record and when he speaks, which isn’t often, people do take notice. Apparently markets do, as well.

However, among the things that he mentioned was that he had lightened up on his position in Apple (AAPL). It didn’t take long for others to chime in and Apple shares fell substantially even when the market was going higher. Although I was waiting for Apple to get back into the $410-420 range, the rebound in share price following news of reduced positions by high profile investors is a good sign and I believe warrants consideration toward the purchase of new shares.

I recently purchased shares of Sunoco Logistics (SXL) in order to capture its generous and reliable dividend. My shares were assigned this past Friday, but I’m willing to repurchase, even at a higher price and even with a monthly option contract to tie me down. In the oil services business it is a lesser known entity and trades with low volume, however, it will share in sector strength, just in a much more low profile manner.

Pfizer (PFE) is another stock that was recently purchased in order to capture it’s dividend and premium and was also assigned this past week. However, it is among the “defensive” stocks that I think would fare relatively well regardless of near term market direction. Like many others that do offer weekly options, my inclination is to consider the selling monthly contracts for the time being.

While healthcare has certainly already had its time in the sun in 2013 and Bristol Myers Squibb (BMY) has had its share of that glory, after some recent tumult in its price and most recently its next day reversal of a strong move the previous day, I find the option premium appealing. However, as opposed to Pfizer, which I’m more inclined to consider a monthly option, Bristol Myers has too much downside potential for me to want to commit for longer periods.

Although I already own shares of Petrobras (PBR) and am not a big fan of adding additional shares after such a strong climb higher off of its rapidly achieved lows, Petrobras recently and quietly had quite an achievement. WHile everyone was talking about Apple’s $17 Billion bond offering that had about $50 Billion in bids, Petrobras just closed an $11 Billion offering with more than $40 Billion in bids.

Caterpillar (CAT), which I also currently own, is a perennial member of my portfolio. To a very large degree it has been recently held hostage to rumors of contraction and slowing in the Chinese economy. It has, however, shown great resiliency at the current price level and has been an excellent vehicle upon which to sell call options.

As shown in the table above, I’ve owned shares of Caterpillar on 11 separate occasions in less than a year. While the price has barely moved in that period, the net result of the in and out trades, as a result of share assignments has been a gain in excess of 35%.

The more ambiguity and equivocation there is in understanding the direction of the Chinese economy the better it has been to own Caterpillar as it just bounces around in a fairly well defined price range, making it an ideal situation for covered call strategies.

Continuing the theme of shares that I currently own, but am considering adding more shares, is British Petroleum (BP). With much of its Deepwater Horizon liabilities either behind it or well defined, shares appear to have a floor. However, in the past year, that has already been the case, as my experience with British Petroleum ownership has paralleled that of Caterpillar in both the number of separate times owning shares and in return – only better.

Of course, better than either Caterpillar or British Petroleum has been Chesapeake Energy (CHK). I’ve owned it 18 times in a year. It too has had much of its liability removed as Aubrey McClendon has left the scene and it is already well known that Chesapeake will be selling assets under a degree of duress. With its turnaround on Thursday and dip below $20, I am ready to add even more shares.

I’ve probably not owned Conoco Phillips (COP) as much as I would have imagined over the past year probably As a result of owning British Petroleum and Chesapeake Energy so often. Shares do go ex-dividend this week which always adds to the appeal, particularly when I’m in a defensive mode.

Salesforce.com (CRM) was a recommendation last week. I did make that purchase and subsequently had shares assigned. This week it reports earnings and as many of the earnings related trades that I prefer, it offers what I believe to be a good option premium even in the event of a large downward move. In this case a 1% return for the week may be achieved if share price doesn’t exceed 8%

Sears Holdings (SHLD) always seems like a ghost town when I enter one of its stores, although perhaps a moment of introspection would indicate that I drive shoppers away. I’m aware of other story lines revolving around Sears and its real estate holdings, but tend not to think in terms of what has been playing out a s a very, very long term potential. Instead, I like Sears as a hopefully quick earnings trade.

In a week that saw beautiful price action from Macys (M), Kohls (KSS) and others, perhaps even Sears can pull out good numbers and even provide some positive guidance. However, what appeals to me is a put sale approximately 8% below Friday’s close that could offer a 4% ROI for the month or shorter.

Another retailer, The Gap (GPS), has certainly been an example of the ability to arise from the ashes and how a brand can be revitalized. Along with it, so too can its share price. The Gap reports earnings this week and has already had an impressive price run. As opposed to most other earnings related trades, I’m not looking for a significant downward move and the market isn’t expecting such a move either. Based on some of the strong retail earnings announced this past week I think The Gap may be an outright purchase, but I would be more likely to look at a weekly option sale and hope for quick assignment of shares.

TIVO (TIVO) is one of those technologies that I’ve never adopted. Maybe that’s because I never leave the house and the television is always on and I rarely see a need to change the station. But here, too, I believe TIVO offers a good short term opportunity even if shares go down as much as 20% following Monday’s earnings release. In the event that shares go appreciably higher, it is the ideal kind of earnings trade, in that coming during the first day of a monthly option contract, it could likely be quickly closed out and the money then used for another investment vehicle.

Om the other hand, Dunkin Brands (DNKN) is definitely one of those technologies that I’ve adopted, especially when having lived in New England. Fast forward 20 years and they are now everywhere in the Mid-Atlantic and spreading across the country as their new offerings also spread waists around the country. Going ex-dividend this coming week and offering a nice monthly option premium, I may bite at more than a jelly donut. However, it is trading at the upper end of its recent price range, like all too many other stocks.

Finally, Carnival (CCL) hasn’t exactly been the recipient of much good news lately. Although it’s up from its recent woes and lows. It does report earnings at the end of the June 2013 option cycle, but it also goes ex-dividend in the first week of the cycle, in addition to a offering a reasonable option premium

Traditional Stocks: Bristol Myers, Caterpillar, Pfizer, Sunoco Logistics

Momentum Stocks: Apple, Chesapeake Energy, Petrobras

Double Dip Dividend: Carnival Line (ex-div 5/22), Conoco Phillips (ex-div 5/22), Dunkin Brands (ex-div 5/23)

Premiums Enhanced by Earnings: Salesforce.com (5/23 PM), Sears Holdings (5/23 AM), The Gap (5/23 PM), TIVO (5/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

 
 

May12013

Shame on you, Apple

Articles

Oh, and congratulations, too.

Shame and congratulations on you for completing the world’s most successful corporate issuance of bonds. $52 Billion in bids clamoring for $17 Billion of product.

Remember when Apple (AAPL) products had that kind of demand?

Remember when its stock had that kind of demand?

Remember, the cynics say that dividends and stock buybacks are the sort of things that you do when you can’t propel the business forward.

A few years ago, in a ruling that will forever remain controversial, the United States Supreme Court essentially ruled, that in at least a narrow definition, corporations were people.

For most purposes that designation is somewhat non-sensical, but for the all important world of campaign financing making corporations animate objects had a great benefit. Namely, the privilege of donating obscene amounts of money to political campaigns.

But along with all of the great privileges of belonging to the human race, there have to be some downsides, as well. Social obligations and the burdens and joys of human emotions come to mind.

Like Adam and Eve in the Garden of Eden, one of the very first human traits that they exhibited after they had done something very wrong and against the “rules” was to feel shame. Ironically, what they did wrong was to have eaten from “The Apple.”

This week, Apple should feel shame.

They borrowed money, as much as 75 basis points above US Treasuries in order to fund a planned $50 Billion buyback and the costs of three years worth of dividend payments.

From a business perspective, Apple should be congratulated, having found a way to satisfy increasingly noisy shareholders and hold the tax man at bay. Although I do wonder why they even had to go 75 basis points above US Treasuries, you can’t argue with the success of the initiative. You would, however, think that Apple was more credit worthy than our own government, but apparently they don’t even measure up to Microsoft (MSFT) in that regard.

While the interest payments are a deductible expense, the real beauty is that Apple is able to put cash directly and perhaps indirectly back in the hands of shareholders without the need to repatriate tons of foreign cash and pay US taxes once having done so. Of course, they also figured out a way to turn down the heat on Tim Cook, just a bit.

Having been an Apple shareholder as recently as last week, I suppose I would have lauded that move by Tim Cook, but now, I find it shameful.

Firstly, not that I expect any devastating news at Apple, but suddenly shareholders have taken a subordinate position to new bond buying stakeholders. The risk to shareholders is certainly small in that regard, but it is also certainly unnecessary.

Secondly, what happened to the ideals?

Although he was a ruthless competitor, the late Steve Jobs had ideals. First and foremost, they related to the products offered by Apple. But they also extended to the financial practices that eschewed capital markets and were ruggedly self-reliant in order to meet its corporate objectives.

While Apple still has exquisite products, among my previous critiques of the company quality of products has never been at issue, they are straying from the founder’s ideals on all counts.

While it can be safely said that the last time Apple ventured into the bond market, it did so to save itself from financial ruination, Steve Jobs had not yet returned to the company. We’ll never know whether Apple under Jobs’ leadership would have been driven to the point of desperation, but we do know that in the 25 subsequent years that source was never tapped again.

Whatever the basis for his ideals, they included a disdain for share buybacks and dividends. As recently as a 2010 shareholder meeting, Jobs stated that Apple needed to keep its cash for growth opportunities and further said that paying a dividend or buying back stock would not change the stock price. You can argue those points, but what you can’t argue is that Jobs’ idealism exchanged the illusory effects of dividends and buybacks for the real effects of stock appreciation.

So here we are. Shares had fallen in excess of $300, the pipeline appears dry and questions regarding TIm Cook’s continuing leadership have popped up.

In response, Apple has gone where the beleaguered go. They have gone the route of buybacks and dividends. Nothing terribly creative, but a step designed to quiet some of the complaints from shareholders and activists.

Yet, they went to the bond markets to get the necessary cash to perform what may in and of itself been unnecessary. By all reports they did so to avoid repatriation of foreign held cash and to avoid paying U.S. taxes upon those funds.

Remember the 2012 elections? Remember candidate Romney and the controversy surrounding his taxes? There was never a question as to whether Romney had broken the law or done anything illegal. It was an issue of his taking advantage of every loophole in the tax code that was imaginable. Not illegal, but most people innately believed that there was just something wrong about navigating a path that no one creating regulation or legislation could have imagined would exist.

Bill Gates and Warren Buffett believe that to be the case. I suppose that’s another way that Apple doesn’t measure up to Microsoft.

On its surface you know that there is something wrong when an individual can have an IRA valued in excess of $100 Million. Not because the amount is so large, but rather because of the annual contribution thresholds. For example, assuming Mr. Romney made a maximum $5,000 contribution each year for 30 years and achieved an annual 35% return, he would still only have $40 million.

Shameful.

Yet here Apple has garnered its own shame. Exploiting the tax code in a way that the average person, perhaps even investors in Apple, intuitively know is wrong. Maintaining a significant cash reserve overseas to avoid paying taxes just doesn’t pass the smell test for most people, despite being legal.

But by so doing, they are also not re-investing any significant portion of their $150 Billion cash reserve into the business, nor are they pursuing meaningful acquisitions. The money sits in a low interest environment.

Given that shameful disregard for shareholders,you could understand why there was a growing chorus for something substantive to be done.

While corporations traditionally did not have social responsibilities, that too is a burden of now joining the human race. Among the social responsibilities is to put their money to work and to pay taxes, without hiding behind the loopholes or the unanticipated escape routes found in existing regulations and legislation.

I’m not really certain whatever happened to Adam and Eve after their banishment from the Garden of Eden. Their expulsion was swift, and perhaps the entire human race paid a steep price for their actions.

I think Apple’s recent action will result in the same steep price for its shareholders as the euphoria around the offering has already disappeared. The future looks less optimistic as Apple settles into a state where they are no different from the rest and beginning to rely on smoke, mirrors and lapses in tax policy to perpetuate their leadership.

In the meantime, without anything substantive in its future, Apple will remain a trading vehicle that may offer risk to those looking at it as a long term value.

While I can’t hold Apple in esteem for their anti-social behavior, and blatant thumbing of its corporate nose at its responsibilities, I do think that if offers some exceptional short term opportunities, especially when coupled with a covered call program.

I look forward to more of those positions as shares come back down in price to the $410-420 range, which I anticipate occurring prior to next week’s ex-dividend date.

As long as they’ve already made a deal with the devil, I may as well get my piece.

 

Apr282013

Weekend Update – April 28, 2013

Weekend Update

Schadenfreude suits me just fine.

Is it really “schadefreude” when you don’t really know or see the people upon whom misfortune has been heaped?

For those that aren’t familiar with the word, “schadenfreude” is the strangely good feeling that some people derive when others fail or are subject to misfortune.

In Talmudic teaching the highest form of charity is when neither the donor nor the recipient are aware of one another’s identity. Complete ignorance raises the act of charity to a higher level.

Of course, we will never be able to answer the question of whether there is really a sound produced when a tree falls in the forest and there is no one present to lay witness. A single degree of separation can completely call into question that which seems patently obvious. Ignorance of an event can be is as if it doesn’t even exist.

Being a covered option seller, I do take some perverse pleasure and satisfaction when the market goes lower, even though I know that the vast majority of investors, especially the individual investor, fares well only when the markets are moving higher.

When I sell longer term call options, such as the monthly variety, I just love seeing the share price exceed my strike level early during the term of the contract, only to watch those gains dissipate as the term nears its end, especially if the end returns right to the strike price.

Somewhere, I just know that someone is asking themselves why they didn’t take their profits when they had the chance.

That’s pretty bad, right? But I never see that person. I’m not really certain that they even exist, except for the fact that I was once that person. To a large degree I believe that I was deeply ignorant back in those days with regard to the discipline of securing profits. These days I’ve simply added ignorance to the fortunes of those on the other end of trades to the list of things unknowable. Additionally, not knowing who they are is the highest form of ignorance.

As this past week was one that I immensely enjoyed and briefly put away my short term pessimism in order to trade at levels that reflect a more bullish tone, I’m now on the fence as to whether the bullish feeling can be sustained given what the past may be revealing.

After hitting market peaks 2 weeks ago and then alternatively going from the worst week of 2013 to one of the best weeks of 2013, I continue to believe that we are replicating the first 5 months of 2012.

So while I’m very happy with the higher tract that stocks took this past week, I’m especially happy to see assignments take place and have the cash settle in my account, to hold or to invest, as the market reveals itself.

Although I would much rather be fully invested, I really do want to see give backs of many gains at this point. Having a sizeable portion in cash and evolving from the use of weekly contracts to monthly ones, or even the occasional June 2013 cycle, makes it easy to make that wish.

If history is a guide, the last correction we experienced lasted just one month and then was completely recovered 2 months after it ended.

I can live with that, at least while cash is on the sidelines. If it happens, and assuming that it’s within tolerable levels, such as 10%, I’ll be reasonably happy, but not in a schadenfreude kind of way, although that kind of admission would certainly get me much more attention. Everyone notices the misanthropic guy and wishing that stock prices retreat may be the highest form of misanthrope, especially if it disproportionately impacts widows and orphans.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence. Additionally, as with the previous week, we are at the height of earnings season and thus far there have been some surprises, perhaps offering more opportunity to sell well out of the money puts prior to earnings.

I really can’t recall the last time I owned shares of ExxonMobil (XOM). Although it is one of the shares that I consistently follow, it rarely has piqued my short term interest. That may be changing a bit as I look at its upcoming and increased dividend. At a time that I’m expecting to be on the precipice of a market decline that is technically driven, rather than fundamentally, I would be more inclined to limit new investments to more defensive stocks that are likely to outperform a falling market during a period of economic stability or growth.

Although Apple (AAPL) was a potential earnings related trade last week, I ultimately waited for earnings and instead purchased shares the next day. Those were assigned, but if shares open the week near the $410 level, I am interested in establishing a new position and using an out of the money monthly contract in order to have an opportunity to also secure the newly increased dividend. I believe that Apple will out-perform the market in the near term and will offer trading opportunities in addition to appealing option premiums.

With last week’s selection Cisco (CSCO) among those assigned, Oracle (ORCL) also one of last week’s potential picks went unrequited. It also under-performed Cisco as some of the networking companies were depressed following Broadcom’s (BRCM) earnings. I’ll be looking to Oracle as a potential purchase this week as well, as the technology sector may be showing some signs of catching up to the overall market with Microsoft (MSFT) and Intel (INTC) showing strength.

As news related to the Chinese economy seems to wag our own stock market, the heavy machinery titans have been slammed back and forth as what is called “news” is so often re-interpreted or presented in different lights that create an alternation between good economic news and bad economic news on a near daily basis. Very often the sector moves in unison even when the exposure to China is limited. While Joy Global (JOY) has significant exposure, PACCAR (PCAR)certainly has less so. Both have recovered a bit this past week as have Caterpillar (CAT) and Deere (DE). ALl, however, continue to trail the S&P 500 in 2013.

Petrobras (PBR) suspended its regular dividend payment in 2012. I’m somewhat embarrassed to still be holding shares priced in the $19-20 range, purchased just before a slew of bad news. Having held onto shares even as they sank as much as almost 25%, it has been clawing its way back. Among the positive signs are the recent announcement of two special dividends. With the hope for some stability in its share price after bad news regarding pricing and production issues have now been digested, it may be time to restart accumulating shares.

Last week playing earnings related trades was a very timely strategy. I don’t know if the pleasant surprises will continue, but I think there may again be some very reasonable risk-reward propositions available, as long as you don’t mind the possibility of owning shares after it’s all said and done.

Among those reporting is Facebook (FB), which despite having received an IPO allocation and currently owning shares at various price points, has become one of my favorite stocks. The existence of extended weekly options opens up many more opportunities to generate option premiums and mitigate the potential impact of sudden adverse moves in share price. At Friday’s closing price, a weekly put sale at a strike price 12.5% below the close could return a 0.7% ROI. For those more adventurous, a strike price only 9% lower could yield a 1.4% return.

Pfizer (PFE) reports earnings this week and fits into the profile that appeals to me the most when considering an earnings related trade. This past week it sustained a large price drop, which is usually the signal that clears me to sell puts on shares. However, in this case, I more likely to consider an outright purchase on shares, not only for some capital appreciation and option premium income, but also in order to capture the May 8, 2013 dividend payment.

Humana (HUM) has been on a true rollercoaster ride. As often happens with health care stocks the various interpretations of how changing legislation or pricing structure may impact share price sends the shares in irrational and alternating directions. With earnings approaching and shares down almost 10% from its 2 week ago high, it represents a potentially acceptable risk-reward offer. If it falls less than another7% the ROI is approximately 1%. That, however, is for the time remaining on a monthly contract, which makes it a little less appealing to me, but still under consideration.

Finally, I’m not certain how much longer the world needs an independent Open Table (OPEN) but it has the kind of pricing volatility at the time of earnings release to make it worth considering a purchase of shares and the sale of deep in the money calls or simply a sale of deep out of the money puts.

Traditional Stocks: ExxonMobil, Oracle, Paccar, Pfizer

Momentum Stocks: Apple, Joy Global

Double Dip Dividend: Petrobras (ex-div 4/30)

Premiums Enhanced by Earnings: Facebook (5/1 PM), Humana (5/1 AM), Open Table (5/2 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.