Jun112016

Weekend Update – June 12, 2016

Weekend Update Comment

Sometimes you just have nowhere to go.

One thing that was fairly certain last week was that there wasn’t too much of a trend and there wasn’t any clear path to follow.

As markets began testing the 18000 level on the DJIA and 2100 on the S&P 500, the chorus was loud and clear.

There is no place to go but up.

The alternating chorus was that there was no place to go but down.

The market instead went sideways, but not very far as all roads seemed to be closed off.

After the previous week, which ended precisely unchanged, this past week managed to move 0.1%,

Granted, the first three days of the week did seem to benefit from Chairman Janet Yellen’s superb demonstration of how hedging your words works to allow people to hear whatever it is that they want to hear.

Following Monday afternoon’s talk, Dr. Yellen essentially said something to the effect of “It’s not good out there, but it’s all good. You know what I mean?”

Years ago I heard a fairly odd individual present a lecture on the pharmacological management of children requiring sedation. He referred to the well known age and weight based rules regarding dosages, but said they were inadequate. Not surprisingly, after listening to him for a brief while, it was only his eponymous rule that could determine the correct amount of sedative agents to administer to a child.

He referred to his rule by example and these were his precise words, that I still remember 30 years later.

“You take the kid’s weight and then you take a day like today. It’s hot, but it’s not hot. You know what I mean?”

Like Janet Yellen, he was from Brooklyn.

The old Brooklyn. Not modern day Brooklyn. In fact, both were from the same Bay Ridge Brooklyn neighborhood.

While I still remember those words 30 years later, they had no influence on me other than to believe that sometimes a monkey can have more credibility than someone with a degree.

The strength of Dr. Yellen’s words, however, starting already growing dim as the latter half of the week approached and traders were left wondering what was going to be the driver for anything between now and the July 2016 FOMC meeting.

Of course, even though most everyone discounts any action at next week’s FOMC meeting, there’s always the chance of a reaction to any change in the wording of the statement as it’s released.

In that event the subsequent press conference may carry even more weight than usual, although you would have to wonder what Yellen could say that would be substantively different from the non-committal tone she struck this week.

With earnings season nearly at its end the catalysts appear to be few between now and that July 2016 FOMC Statement release. Some upcoming and compelling GDP and Employment Situation Report numbers, particularly if there are strong upward revisions, could be all the catalysts necessary, but after this past Friday’s performance, oil prices may be relevant once again.

That’s after a couple of weeks of the stock market not tethering itself too tightly to oil prices. But with interest rates possibly taking a back seat for a short while, there may be a void to fill and oil seems the logical driver.

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

I haven’t traded much in the past few weeks, nor for 2016, for that matter, but oil has gotten more of my attention than anything else.

Although Marathon Oil (MRO) has gone significantly higher in the past 10 weeks, following Friday’s decline, I wouldn’t mind owning shares for a third time during that time period.

Following oil’s run higher and seeing it break the $50 level, that level may be under assault and those oil company shares that had moved nicely higher in 2016 may also be under assault.

Friday was an example of the risk that may lie ahead of some oil companies, but the option premiums are reflective of those risks, just as they were when I first added Marathon Oil and Holly Frontier (HFC) in the past 2 months, to keep company with my uncovered lots of shares in those companies.

Even with Marathon Oil’s decline on Friday, those shares are still somewhat higher than I would like if considering re-establishing a position. However, with any further weakness on Monday, despite the near term risk, this is probably my most likely trade for the week.

While I’m anxious to open some new positions, that doesn’t include the need to be reckless. Despite the downside risk to opening a new position in Marathon Oil, the liquidity in the options market is fairly good in the event of a need to rollover the position following a large adverse price move.

With the availability of extended weekly options if there is such an adverse price move, there would be opportunity to extend the time frame of the expiration and collect some premium while waiting for the inevitable volatility to take the price higher and then lower and then higher again.

Both Gilead Sciences (GILD) and Tiffany & Company (TIF) are ex-dividend this week.

I have some subscribers for whom Gilead has been a long time favorite and I often wished that I had followed their path. There were certainly no signs preventing me from doing so.

At almost all price points over the past 2 years, a position in Gilead, if either buying shares and selling calls or simply selling puts, would have been a good place to be, if rolling over calls or puts and having some patience.

That is the case even at most of the various high points thanks to the option premiums and the dividends and the ease of rolling over positions owing to the options liquidity offered.

With eyes only on the dividend and a short term holding, I don’t think very much about its drug pipeline or pricing pressures or opportunities that may come following the Presidential election. Having a short term horizon makes all of those sentinel events new opportunities and the latter uncertainty is still very far off.

With Tiffany shares just barely above their 2 year lows, it has been more than 3 years since I’ve owned shares.

Perhaps coincidentally, that last time was at the current price.

Back then, when only monthly options were available, my preference was to consider a purchase of shares during the final week of the monthly option cycle or when an ex-dividend date was upcoming.

This week happens to offer both, but Tiffany now offers extended weekly options.

With a much higher dividend per share than when I last owned it and a yield that is enhanced by its current price, Tiffany is back on my radar screen.

As challenged as retail has been since Macy’s (M) started off a string of disappointing earnings reports and as flat as the world’s economies have been, particularly those important for Tiffany’s sales, I think that this is both a good time and a good opportunity to consider a new position, but as with Gilead, it may require some patience.

If while exercising that patience there is opportunity to continue collecting option premiums, patience is well rewarded. With earnings more than 2 months away, I wouldn’t mind the opportunity to serially roll over calls, but also wouldn’t mind being able to exit the position prior to earnings.

Finally, I haven’t had much reason to think about buying shares of Oracle (ORCL) lately. The last time I owned shares was nearly 3 years ago and at that time I owned them on 3 separate occasions over the course of a few months.

In my ideal world, that would be the case with most stocks when opening a new position, but that hasn’t been the case for me of late. Maybe Marathon Oil will change that this week, but I think that Oracle could now be positioned to do the same.

Oracle reports earnings this week and its current price is somewhat above the mid-way point between its recent high and recent low.

I generally like to consider a purchase when a stock is at or slightly below that mid-way point. However, even with the risk of earnings approaching and without a really compelling premium despite the added risk of upcoming earnings, I’m considering a position.

However, with the chart in mind and seeing the climb that Oracle shares had taken since February, as well as the precipitous declines it has been known to take, I have no interest in establishing a position prior to earnings.

I would, however, very strongly consider opening a position if shares decline by anything approaching the 5% implied move that the options market is predicting. In that event, I would likely sell puts to open a position, but would be mindful of an upcoming ex-dividend date either late in the July 2016 option cycle or early in the August cycle.

Things have been quiet at Oracle for a while as Larry Ellison has stepped back and replaced a form of autocratic rule with muddled lines of leadership. In the past when Oracle disappointed on earnings, Ellison was always quick to point fingers.

Since I don’t currently own shares and have nothing to lose, I welcome a sharp decline in Oracle, only in the hope that it might re-animate Ellison and perhaps re-create a leadership structure that will move forward even if all signs say there is nowhere to go.



Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Gilead Sciences (6/14 $0.47), Tiffany & Co (6/16 $0.45)

Premiums Enhanced by Earnings: Oracle (6/16 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.

May72016

Weekend Update – May 8, 2016

Weekend Update Comment

Depending upon how concrete you are in interpreting the meaning of the concept of “the circle of life,” the beginning and the end of that circle must be identical events as their points in space are coincident.

Various religions and philosophies believe that through a certain life path, another life awaits, but the rigorous requirements of geometry may be put aside in the process.

It’s also not clear that there had been any data dependency in the formulation of the philosophical concept.

Life, death and re-birth almost reads like a stock chart, except that the stock chart is plotted over time.

While new life generally brings joy, a geometric centric definition of “the circle of life” would both begin and end with that kind of joy.

On the other hand, a more philosophical interpretation of the concept has some diametrically different events, death and life, coinciding as the circle is closed.

Philosophy aside, markets have their own circle of life.

Start where you like in defining that circle, but among the components are low interest rates; increasing business investment for growth; increasing productivity; increasing corporate profits; increasing employment; increasing consumer spending; higher prices; higher interest rates; decreasing business investment; decreasing productivity;  decreasing employment; decreasing consumer spending and on and on.

That’s more or less a traditional look at the way things usually go, but at the moment it’s hard to know where in that circle we are or if we even have a circle.

If the top of the circle represents the highest point of an economy, I think that I would have to agree with Stanley Druckenmiller, who at this week’s Sohn Conference expressed the belief that the bull market was exhausted.

That would lead one to believe that perhaps revenues and more importantly corporate profits had now peaked and that the eventual tonic to return to a virtuous cycle of increases across the board would be to lower interest rates.

Lower? But the FOMC, claiming to be data dependent, has clearly been ready to increase them.

One has to question where the data was when rates were increased late in 2015, but Druckenmiller also quipped that “quite ironically, this is the least ‘data dependent’ Fed we have had in history.”

The circle of life tries to put a positive spin on what we all will inevitably face, but if late 2008 and early 2009 represented the inevitable bottoming out of the economy and stock markets, with the exception of stock prices since that time, it is still difficult to see real evidence of a re-birth having had taken place.

Increasing employment? Yes, but where is the spending? Where is the upward pressure on prices? Where are the corporate profits?

Where is the reason to increase interest rates?

This past week was an interesting one, with investors not really knowing what to believe or where on the circle we were standing.

With both the ADP Report and the Employment Situation Report coming with disappointingly low numbers, investors are left with wondering what to do about bad news.

You can’t blame them for being undecided as to whether bad news is good news for stocks or truly bad news for everyone.

With this earnings season having been fairly lackluster to date, we’re now faced with retail earnings and there is already reason to believe that they will be less than robust.

If that turns out to be the reality, it’s difficult to see the sunny side of the circle or how we can get there.

If we keep counting on the stock market following oil higher, there may be some real disappointment ahead, as the underside of the circle is more likely to reduce demand for energy.

Of course, simply following oil higher, as has been the case for the past two months in the absence of real demand increases, is also a sure path to disappointment when reality finally checks in.

On a positive note, if you’re the kind that prefers to live in the ascendancy of a civilization, there is some comfort in the belief that the bottom of the circle may be nearing.

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

With its earnings now out of the way, Icahn Enterprises (IEP), not to be confused with Icahn Capital Management, goes ex-dividend this week.

Given Icahn Enterprise’s share price trajectory, it wouldn’t be too surprising if its major share holder, Icahn Capital Management took on an activist role and perhaps tried to unseat management and board members, replacing them with their own, in a true circle of life exercise.

That scenario is pretty unlikely, but one does have to wonder whether Icahn Capital Management, now armed with lots of cash from its sale of its Apple (AAPL) position might not consider Icahn Enterprises to be bargain priced.

Given a nearly 11% dividend that may be reason enough for Icahn’s hedge fund to add shares and keep it far the single largest holding of Icahn Capital Management.

On the downside, if considering a purchase, I would look at this more of a long term commitment, particularly as only monthly options are available and there are $5 strike units instead of the $0.50 ones that I prefer in the weekly variety of expirations.

Following the much larger than expected loss reported by Icahn Enterprises, which included both shortfalls on the top and bottom lines, there’s probably some consternation going on, particularly as Icahn might like to have a cleaner balance sheet before being nominated as Treasury Secretary.

I’ve never visited a Shake Shack (SHAK), but have been tempted the few times I’ve been in the vicinity of one. Fortunately, my better half reminds me that I may be just one clot away from the dark side of the circle of life.

After a flurry of buying and more buying after its IPO, lasting for about 2 months, I’m finally ready to consider a position, as Shake Shack reports earnings this week.

I generally like to wait at least 6 months before considering a new position in a new public company and we are now into the early part of the second year of shares trading.

Since Shake Shack has no dividend to factor into the equation, any consideration of opening a position before or after earnings is fairly straightforward for me.

I would only consider the sale of puts.

With an implied price move of about 8.7%, a 1% ROI on the sale of a weekly out of the money put could be achieved at a strike price approximately 9.7% below Friday’s closing price.

ANything outside of the range predicted by the option market that returns 1% of more is fair game for consideration.

However, the trend for Shake Shack over the past few quarters has been to move lower after earnings have been announced and to surpass the levels predicted by the option market.

For that reason, if considering a position, I would be most inclined to do so after earnings. In the event that shares take a large drop lower, I would entertain the thought of selling puts, but might wait a bit to let some of the dust settle.

It was a tough week or two for some energy stocks, but I’m ready to re-visit a position that I had assigned just a few weeks ago.

I can’t necessarily say that there is anything inherently better about considering a position in Marathon Oil (MRO) over Exxon Mobil (XOM), but I have been burdened by a much more highly prices position in the former and I do like the idea of whittling down some of those paper losses with some high priced premiums from the purchase of new shares and sale of calls.

AS an example of the potential return, based on Friday’s $12.03 close, the sale of a weekly $12 call option at a premium of $0.44, would result in an ROI of 3.4% if assigned.

That could be a big “if,” however, there is sufficient liquidity in those options to likely be able to find a reasonable marginal ROI for subsequent weeks, if continuing to roll over that position, perhaps taking advantage of the availability of extended weekly options to buy some time if awaiting a price rebound.

Finally, in a week where my considerations are more toward taking on risk, there’s some comfort in a company like Pfizer (PFE), which is ex-dividend this week.

There is a general consensus that Pfizer is dead money unless it does something very substantive. There was a time when that meant coming up with a new blockbuster drug.

Now, that means buying some other company that can come up with or has a blockbuster drug, as if Pfizer has no ability to do that on their own. That’s despite having a good number of promising drugs in Phase 3 and that have decent sized target risk 

Pfizer is now trading near the level to which it climbed when rumors of a deal with Allergan (AGN) broke. Even as news of that deal breaking apart became known, Pfizer shares had already given up the market’s premium.

As the Allergan deal is now dead and not likely to be subject to re-birth, the sector is alive with activity and Pfizer isn’t likely to sit on the sidelines.

Unless it engages in a bidding war, the market is likely to look at any initiatives as being good for the company and I would expect share price to rise.

In the meantime, there’s the dividend and the option premium.

I wouldn’t mind if Pfizer just traded in a range for a while and would be happy to see a different virtuous cycle of life.

One that sees the opening of a short call position, then its expiration, only to be followed by the sale of yet another.

 

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Icahn Enterprises (5/10 $1.50), Pfizer (5/11 $0.30)

Premiums Enhanced by Earnings: Shake Shack (5/12 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.

 

Mar192016

Weekend Update – March 20, 2016

Weekend Update Comment

Best laid plans often have a way of working out other than expected.

On slow days I make it a point to go and sit in anyone’s waiting room, even without an appointment, just to read stale issues of business and news magazines.

Eventually I get up and leave and feel better about my track record.

Doing that tends to reinforce the belief that the “experts” called upon to predict what awaits in the future are invariably wrong, even as self tying sneakers depicted in “Back to the Future” may now become somewhat of a reality.

Sometimes it’s the timing that’s all wrong and sometimes it’s the concept.

Unless you put much stock in a prediction, such as converting all of your assets to gold in anticipation of yet another Doomsday, they tend to be forgotten unless a dusty magazine is picked up.

The plan to be awash in the one true and universal currency might have seemed like a good idea until coming to the realization that it’s hard to spread on a slice of bread, even if you actually had a slice of bread.

While you can’t be very certain about the accuracy of a “futurists” predictions, you can be very certain that no self-respecting expert on the future keeps a complete scorecard and most would probably be advocates of having physician’s offices regularly rotate their stock of reading materials.

When the FOMC does finally decide to raise interest rates again most will likely have forgotten their earlier prediction of the need for a series of rate hikes. 

Not too long ago the FOMC was predicting a more robust economy for 2016 than has been the case and this past week the members saw things somewhat differently.

To its credit, the FOMC and Chairman Yellen didn’t disown the past, which sometimes, due to revisionism can be just as difficult to discern as the future.

For what seems like the longest time, I have seen a future that has traders finally coming to the belief that a growing economy was good news and the need to continue cheap money policy was bad news.

Conceptually that has to make sense, so I’ll blame poor timing on the poor progress toward changing sentiment.

I’ve also been waiting for the longest time to see lower oil prices prod a consumer based economy toward growth and taking corporate revenues and profits to higher levels.

And I keep waiting for stock prices and oil prices to disassociate from one another during a period that oil prices are more influenced by oversupply and not reduced demand.

The track record on those is pretty abysmal, although for some very brief periods over the past few weeks it looked as if that disassociation might finally be coming.

If your memory can go back far enough, you may remember that as 2015 was coming to its end many were predicting that 2016 would follow the pattern seen in the year following a flat year in markets.

It didn’t take very long for that prediction to itself fall flat.

But what no one would have predicted was that as bad as the first 6 weeks of the year had been, the subsequent 5 weeks would erase the losses and perhaps even serve to rehabilitate the earlier prediction. 

There is little economic news next week other than release of the GDP, which has reflected less impressive than predicted growth of late.

I can confidently predict that it will have no impact on Friday’s stock market close, but I’m not willing to venture as far into the future as the following Monday.

At least I’m capable of learning from my mistakes and am equally confident in predicting that will not always be the case.
 

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

One thing that I would not have predicted was just how shortly following the market’s embrace of the Dow Chemical (DOW) and DuPont (DD) merger deal the price premium would be lost.

With shares trading just above their pre-merger disclosure and having had gone below that level in the early part of 2016, I’ve believed that there was relatively little merger related risk associated with those shares.

I had bought shares twice after the merger announcement and am ready to do so again, particularly as shares have had a somewhat irrational pattern of following the price of oil and now that trend is higher.

With its option premium still reasonably attractive as there is still a perception of either oil or merger related risk, I also have my eyes on its ex-dividend date, which is at the end of the month.

For that reason I would probably look at selling an extended weekly option and if faced with a possible early assignment, I would consider further rolling the option over, if only to get some additional premium to offset the loss of the dividend to the option buyer.

Among the things that many predicted, including myself, was that financial sector stocks would perform nicely as the path for interest rates after the FOMC’s decision at the end of 2015 was going to be higher.

In anticipation that would be the case, I had purchased shares of Morgan Stanley (MS) on 4 occasions in the 2 months leading up to that eventual decision.

That seemed like an easy thing to predict. It was a fifth purchase, that came a few weeks after the announcement that went counter to what seemed predictable.

Instead of interest rates continuing to move higher as any sane seer would have predicted, they went lower and lower, as did most financial sector stocks.

So here we are again with the feeling that now rates can only go higher, but without much confidence in when they will start to happen.

It may be the uncertainty of the latter that makes considering opening a position to be a more predictably rational thing to do.

Last week Williams Companies seemed like a good idea, particularly as there may have been some inefficiencies in its pricing and a divergence between the arbitrage and options communities regarding the prospects of its planned merger.

This week, Marathon Oil (MRO) doesn’t have the same kind of drama figuring into the equation, but along with a battered sector, it may have been price compressed more than most and with the prospects of a larger spring back.

However, even price stability in oil could create an attractive environment for accumulating very generous option premiums.

While those option premiums are attractive, I would probably sacrifice some of the assured premium by selling out of the money strikes in an effort to also capture some capital gains on shares.

As is often the case during periods of high market volatility or individual stock volatility, there may also be advantage in rolling over calls even if faced with assignment as the forward week premiums may be continuing to reflect greater uncertainty.

That was a nice formula in 2008, 2009 and the latter half of 2011 and I wouldn’t mind seeing more of those opportunities appear.

Finally, having purchased eBay (EBAY) a few weeks ago was like re-discovering an old, old friend.

I hadn’t owned shares since the confirmation that eBay was going to spin off the driver of its growth, PayPal (PYPL).  There was probably some luck with having made that first purchase in over a year on the day before the market decided to end the craziness of the first 6 weeks of 2016.

With volatility at its peak for 2016 that was a good time to consider buying just about anything, if only you could have predicted what was in store in the subsequent 5 weeks.

I couldn’t, but at the same time I couldn’t resist the lure of eBay shares. Despite having climbed 5% since then, that performance pales in comparison to the S&P 500 which was nearly 10% higher during that time span.

What eBay is continuing to offer, even as volatility has started returning to the levels it had languished for up until the past 6 months, is an attractive option premium.

The reason I had found myself having purchased shares of eBay on 25 occasions during a 4 year period, despite not having owned any shares for more than a year of that time span, is that it tended to trade in a tight range, but due to occasional surges or plunges, offered a very attractive premium.

They say that you can’t go back home, but predictably you do and sometimes it works out.

Traditional Stocks:  Dow Chemical, eBay, Morgan Stanley

Momentum Stocks:  Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: None

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

Mar72015

Weekend Update – March 8, 2015

Daily Market Update Comment

It seems as if it has been a long time since we were at that stage where good economic news was interpreted negatively and bad news was celebrated.

Lately, on the economic front there really hasn’t been any bad news, although depending on your perspective perhaps the good news just hasn’t been good enough. That might include unrequited expectations for a consumer buying frenzy that hasn’t yet materialized as a result of energy savings.

On the other hand the good news has been steady. Not terribly spectacular, but a steady climb toward an improved economic landscape for more and more people. Again, to put a little cynical spin on things, for some the climb has been far too slow and the 5.5% unemployment rate a bit illusory as so many may have simply dropped out of the employment seeking pool.

After a week in which the market moved in alternating directions on no news at all during the first 3 days of trading, it finally reverted to a paradoxical form when the Employment Situation Report was released on Friday morning.

A much better than expected number and with no revisions to previous months was great if you were among those looking for and finding a new job. What it wasn’t great for were the prospects of interest rates staying low and the Federal Reserve continuing with its “patience.”

At least that’s how the impact of the data was perceived. The good news was cast in a very negative way and the immediate reaction was not much different from the panic that might beset a grocery store when in August the Farmer’s Almanac may call for unusually brutal winter and people clear the shelves of milk in anticipation.

While there are still far too many people in need of jobs and newly created jobs aren’t necessarily of the same caliber of pay as those lost since 2008, for some the burden of the good news was too much to bear and the selling accelerated to a level not seen in quite a while, although never really to the point of toilet paper frenzy.

At the very least for those who practice a paradoxical approach to the interpretation of news, they were able to contain some of their emotions even as their irrational selling ruled the day. It was like still finding a carton of milk after the hordes had beaten you to the store, indicating that not everyone believed that Armageddon was the next stop.

I think that if I could choose, I’d much rather be trading stocks when there is an identifiable and consistent reaction to events, even if it may be less than rational. The early part of the week, moving up and down daily in individual vacuums could do little to create any kind of confidence regarding market direction. In essence, it’s easier to plan survival tactics when maniacs are in charge than it is when no one is in charge.

Those that were in charge on Friday based their actions on fear and dragged the rest of us down with them.

They were fearful that putting more people to work would accelerate the timetable for raising interest rates. That in turn would lead to greater costs of doing business and would be coming at a time that the rest of the world is lowering rates.

That would probably lead to even greater strength in the US Dollar, perhaps even USD and Euro parity, which only serves to accentuate those currency headwinds that have already been highlighted as reducing corporate earnings and would only further create competitive threats.

Cycles. You can’t live with them and you can’t live without them.

The reaction by traders on Friday would have you believe that none of this was previously known or suspected to be in our future.

The reality is that we all know that rates are going to go higher. It’s just a question of whether we follow Janet Yellen’s perceived path or Stanley Fisher’s accelerated path.

Personally, my fear is how we could be trading in a market that in the space of a single week, when both Yellen and Fischer expressed their opinions, could go from the comforting assurances from Janet Yellen to completely tossing out those assurances. That leads to the question of whether we believe she is simply wrong or just lying.

Neither of those is very comforting.

It’s actually even worse than that, as last week the market, following a positive response to Yellen’s comments turned on her barely 2 days later upon Fischer’s suggestion that interest rate increases would be coming sooner, rather than later.

On the other hand a more rational consideration of Friday’s reaction would suggest that maybe the reaction itself was irrational and unwarranted because Janet Yellen is in a better position to know about the timing or rate increases than a nervous portfolio manager and is probably much less likely to lie or mis-represent her intentions.

There’s always that.

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

Following Friday’s sell-off a number of positions appear to be more appropriately priced, however, the accelerating nature of the sell-off should leave some residual precaution as approaching the coming week, as even stock innocents were taken along for the plunge on Friday and could just as easily still be at risk.

Another large climb in 10 Year Treasury interest rates makes interest related investment strategies more appealing to some and the impending start of the European version of Quantitative Easing may also serve to siphon investment funds from US equity markets.

While I do have some room in my mind and heart for some more exciting kind of positions this week, my primary focus is likely to be on more mundane positions, especially if there’s a dividend at hand. This week’s selection is also more limited, than usual, as I expect my week to be ruled by some of that heightened caution, at least at the outset of trading.

Huntsman (NYSE:HUN), Coca Cola (NYSE:KO) and Merck (NYSE:MRK) seem to be appropriate choices for the coming week and all under-performed the S&P 500 during the past week, with the latter perhaps having more currency related considerations in their futures.

Trading right near its one year low is Huntsman Corp . It’s not a terribly exciting company, but at the moment, who really needs excitement?

Trading only monthly options I might consider the use of a longer term option sale, perhaps a May 2015, to further reduce the excitement, while bypassing earnings in late April and adding a decent sized premium to the potential return, in addition to the upcoming dividend and, hopefully, some capital gains from shares, as well.

There probably isn’t very much that can be said about Coca Cola that would offer any great new insights. With a number of potential support levels beneath its current price and a recently enhanced option premium, particularly in a week that it is ex-dividend, a position seems to offer a good balance of reward with risk.

While the company may still be floundering in its efforts to better diversify its portfolio of offerings and while it may continue to be under attack for its management, those may be of little concern for a very short term strategy seeking to capitalize on option premiums and the upcoming dividend. At its current price level, however, it is below its mid-point level range for the past 6 months and may offer some near term upside in the underlying shares in addition to the income related opportunities.

You really know that it’s no longer your “grandfather’s stock market” when big pharma is no longer the keystone in everyone’s portfolio and is no longer making front page new on a daily basis. Instead, increasingly big pharma is playing second fiddle to smaller pharmaceutical companies, at least in garnering attention, unless it is involved in a proposed buy-out or merger, as is increasingly the case.

On a steady price decline since the end of January 2015, when the market started its own party mode, Merck shares are also ex-dividend this week and offer a better premium proposition than is normally the case when doing so.

Dow Chemical (NYSE:DOW) has for the past few months been held hostage by energy prices and will likely continue so while the supply – demand situation for oil evolves for better or worse.

The only good news is that while it may be unduly castigated for its joint energy holdings the impact has been relatively muted. During the past few months as shares have become more volatile its option premiums have understandably been increasing and making it again worthy of some consideration.

Although it doesn’t go ex-dividend for another 3 weeks I would already place my sights on trying to capture that dividend and would consider a longer term option contract in order to attempt to lock in several weeks of premiums in addition to the dividend as oil is likely to go up and down many times during that time frame.

Sometimes, the best approach during periods of advanced volatility is to try and ride things out by placing some time distance between your short option positions and events.

I was considering adding more shares of Mosaic (NYSE:MOS) a few weeks ago, as it passed the $52.50 level, thinking that it might be ready for a breakout, perhaps bringing it back to levels last seen before the breakdown of the potash cartel. I can’t really recall why I ultimately decided to look elsewhere, but instead shares went into another break-down.

That breakdown last week will hopefully be much smaller, since I already own shares and will take nowhere near as long to recoup the losses.

The nearly 8% decline in shares last week for no discernible reason has now brought them back to the upper range of where I had most recently been comfortable adding shares. While the broader macro-economic picture may suggest less acreage being put to use to add to the supply of already low priced crops there isn’t such a clean association between commodity prices and fertilizer prices.

With its ex-dividend date having just passed and with the recent trend still pointing downward, Mosaic may be a good candidate to consider the sale of put options as a means of potential entry into a long position, but at an even lower price.

Finally, for the third consecutive week I would consider establishing a position in shares of United Continental (NYSE:UAL) as part of a paired trade with an energy holding, especially if you crave the kind of excitement that Huntsman may not be able to provide.

I’ve been using Marathon Oil (NYSE:MRO) as the matching energy position and had my UAL shares assigned this past Friday, despite a large price drop for the second consecutive week just before expiration.

With the energy holding still in my portfolio I would consider another purchase of UAL, particularly if there is weakness in its shares to open the week. As has been the case previously, because of the volatility in shares the option premiums have been very generous. However, rather than directly taking advantage of those premiums, my preference has been to balance risk with reward and instead have opted for lower premiums by selecting deep in the money strike prices. Doing so allows shares to drop in price while still being able to deliver an acceptable ROI for the week.

Traditional Stocks: Dow Chemical

Momentum Stocks: Mosaic, United Continental

Double Dip Dividend: Huntsman (3/12), Coca Cola (3/12), Merck (3/12)

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.

Feb282015

Weekend Update – March 1, 2015

Weekend Update Comment

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved oppositely to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 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.

Feb212015

Weekend Update – February 22, 2015

Weekend Update Comment


After setting a new high on the S&P 500 last week, the bull was asleep this holiday shortened trading week, having been virtually flat for the first 3 days of trading and having been devoid of the kind of intra-day volatility that has marked most of 2015.

That’s of course only if you ignore how the week ended, as this time the S&P 500 wasn’t partying alone, as the DJIA and other indexes joined in recording new record highs.

For the briefest of moments as the market opened for trading on Friday morning it looked as if that gently sleeping bull was going to slip into some kind of an unwarranted coma and slip away, as the DJIA dropped 100 points with no consequential news to blame.

However, as has been the case for much of 2015 a reversal wiped out that move and returned the market to that gentle sleep that saw a somnolent market add a less than impressive 0.1% to its record close from the previous week.

In a perfect example of why you should give up trying to apply rational thought processes to an irrational situation, the market then later awoke from that gentle sleep in a paroxysm of buying activity, as an issue that we didn’t seem to care about before today, took hold, thereby demonstrating the corollary to “It is what it is” by showing that it only matters when it matters.

That issue revolved around Greece and the European Union. The relationship of Greece and the EU seemed to be heading toward a potential dissolution as a new Greek government was employing its finest bluster, but without much base to its bravado. As it was all unfolding, this time around, as compared to the last such crisis a few years ago, we seemed content to ignore the potential consequences to the EU and their banking system.

While that situation was being played out in the news most analysts agreed it was impressive that US markets were ignoring the drama inherent in the EU dysfunction. The threat of contagion to other “weak sister”nations in the event of a member nation’s exit and the very real question of the continuing integrity of that union seemed to be an irrelevancy to our own markets.

Yet for some reason, while we didn’t care about the potential bad news, the market seemed to really care when the bluster gave way to capitulation, even though the result was reminiscent of the very finest in “kicking the can down the road” as practiced by our own elected officials over the past few governmental stalemates.

From that moment on, as the rumors of some sort of accord were being made known the calm of the week gave way to some irrational buying.

Of course, when that can was on our own shores, the result in our stock market was exactly the same when it was kicked, so the lesson has to be pretty clear about ever wanting to do anything decisive.

Next week, however, may bring a rational reason to do something to either spur that bull to new heights or to send it into retreat.

Forget about the impending congressional testimony that Janet Yellen will be providing for 2 days next week as the impetus for the market to move. Why look for external stimulants in the form of economist-speak when you already have all of the ingredients that you need in the form of fundamentals, a language that you understand?

While “Fashion Week” was last week and exciting for some, the real excitement comes this week with the slew of earnings from major national retailers trying to sell all of those fashions. While their backward looking reports may not reflect the impact of decreased energy prices among their customers, their forward looking comments may finally bring some light to what is really going on in the economy.

With “Retail Sales” reports of the past two months, which also include gasoline purchases, having left a bad taste with investors, a better taste of things to come has already been telegraphed by some retailers in their rosy comments in advance of their earnings release.

This coming week could offer lots of rational reasons to move the market next week. Unfortunately, that could be in either direction.

With earnings reports back on center stage after a relatively quiet earnings week, stocks were mostly asleep, but, that was definitely not the case in other markets. If looking for a source of contagion there are lots of potential culprits.

Bond markets, precious metals and oil all continued their volatility. The 10 Year Treasury Bond, for example saw abrupt and large changes in direction this week and has seen rates head about 30% higher over the past couple of weeks after the FOMC sowed some doubt into their intentions and timing.

^TNX Chart

^TNX data by YCharts

While Janet Yellen may shed some light on FOMC next steps and their time frame, she is, to some degree held hostage by some of those markets, as traders move interest rates and energy prices around without regard to policy or to what they position they held deeply the day before.

For my part, I don’t mind the marked indecision in other markets as long as this current market in equities can keep moving forward a small step at a time in its sleep.

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

Yahoo (NASDAQ:YHOO) after all of these years is sadly in the position of having to establish an identity for itself, although with a market capitalization of $42 billion lots of that sadness can be assuaged.

It’s difficult to think of another situation in which a CEO has seen shares rise nearly 180% during their tenure, in this case about 30 months, yet remain so highly criticized. However, after a storied history it is a little embarrassing to be best known as the company that once owned Alibaba (NYSE:BABA), although the billions received and the billions more to come help to ease some of that awkwardness.

With Alibaba’s next lock-up expiration coming on March 18, 2015, there’s potentially some downward pressure on Yahoo which still has a sizeable stake in Alibaba, However, as has been seen over the last few years the flooding of the market with new shares doesn’t necessarily result in the logical outcome.

In the meantime, while there is some concern over the impact of that event on Yahoo shares and as Alibaba has its own uncertainties beyond the lock-up expiration, option premiums in Yahoo have gotten a little richer as shares have already come down 11% since earnings were reported. After that decline either a covered call or put sale, as an intended very short term trade may be appropriate as waiting for Yahoo to find itself before you grow too old.

For as long as Jamie Dimon remains as its CEO and Chairman, JP Morgan Chase (NYSE:JPM) isn’t likely to have any identity problems. Despite not having anywhere near the returns of Yahoo during the period of his tenure and having paid out much more in regulatory fines than Yahoo received for its Alibaba shares, the criticism is scant other than by those who battle over the idea of “too big too faii” and the actual fine-worthy actions.

However, just as the CEO of Yahoo was able to benefit from an event outside of her control, which was the purchase of Alibaba by her predecessor years earlier, Dimon stands to benefit from what will eventually be a rising interest rate rate environment. Amid some confusion over the FOMC’s comments regarding the adverse impact of low rates, but also the adverse impact of raising them too quickly, rates resumed their climb after a quick 4% decline. While the financial sector wasn’t the weakest last weak, energy had that honor, there isn’t too much reason to suspect that interest rates will return to their recent low levels.

BGC Partners (NASDAQ:BGCP) is another company that has no such identity problems as much of its identity is wrapped up in its Chairman and CEO, who has just come to agreement with the board of GFI Group (NYSE:GFIG) in his takeover bid.

For the past 10 years BGC Partners has closely tracked the interest rate on the 10 Year Treasury Note, although notably during much of 2014 it did not. Recently, however, it appears that relationship is back on track. If so, and you believe that rates will be heading higher, the opportunity for share appreciation exists. In addition to that, however, is also a very attractive dividend and shares do go ex-dividend this week. With only a monthly option contract available and large gaps between strike levels, this is a position that may warrant a longer term time frame commitment.

Also going ex-dividend this week are McDonalds (NYSE:MCD) and SanDisk (NASDAQ:SNDK).

I often think about buying shares of McDonalds, but rarely do so. Most of the time that turned out to have been a bad decision if looking at it from a covered option perspective. From a buy and hold perspective, however, it has been more than 2 years since there have been any decent entry points and returns.

With a myriad of problems facing it and a new CEO to tackle them my expectation is that more bad news is unlikely other than at the next earnings release when it wouldn’t be too surprising to see the traditional use of charges against earnings to make the new CEO’s future performance look so much better by comparison. Between now and that date in 2 months, I think there will be lots of opportunity to reap option premiums from shares, as I anticipate it trading in a narrow range or higher. Getting started with a nice dividend this week makes the process more palatable than many have been finding the menu.

SanDisk is a company that was written off years ago as being nothing more than a company that offered a one time leading product that had devolved into a commodity. You don’t, however, see too many analysts re-visiting that opinion as they frequently offer buy recommendations on shares.

SanDisk is also a company that I’ve very infrequently owned, but almost always consider adding shares when I have cash reserves and need some more technology positions in my portfolio. After a week of lots of assignments both are now the case and while its dividend isn’t as generous as that of McDonalds, it serves as a good time for entry and offers a very attractive option premium even during a week that it goes ex-dividend.

Despite a 10% share price increase since earnings, it is still about 15% below its price when it warned on earnings just a week prior to the event and received a belated downgrade from “buy to hold.” WIth continuing upside potential, this is a position that I would consider either leaving some shares uncovered or using more than one strike level for call sales

Most often when considering a trade involving a company about to report earnings and selling put options, my preference is to avoid taking ownership of shares. Generally, put sales shouldn’t be undertaken unless willing to accept the potential liability of ownership, but sometimes you would prefer to only take the reward and not the risk, if you can get away with doing so.

Additionally, I generally look for opportunities where I can receive a 1% ROI for the sale of a weekly put contract that is a strike level below the lower range of the implied move determined by the option market.

However, in the cases of Hewlett Packard (NYSE:HPQ) and The Gap (NYSE:GPS) that 1% ROI is right at the lower boundary, but I would still consider the prospect of put sales because I wouldn’t shy away from share ownership in the event of an adverse price move.

The Gap, which makes sharp moves on a regular basis as it still reports monthly sales, did so just a week earlier. It seems to also regularly find itself alternating in the eyes of investors who send shares higher or lower as if each month brings deep systemic change to the company. However, taking a longer term view or simply looking at its chart, it’s clear that shares have a way of just returning to a fleece-like comfortable level in the $39-$41 range.

In the event of an adverse price movement and facing assignment, puts can be rolled over targeting the next same store sales week as an expiration date or simply taking ownership of shares and then using that same date as a time frame for call sales. If rolling over puts I would be mindful of an April ex-dividend date and would consider taking ownership of shares prior to that time if put contracts aren’t likely to expire.

Since I have room for more than a single new technology position this week, Hewlett Packard warrants a look, as what was once derisively referred to as “old tech” is once again respectable. While I would consider starting the exposure through the sale of puts, with an ex-dividend date coming up in just a few weeks, I’d be more inclined to take assignment in the event of an adverse price move after earnings.

Finally, there’s still reason to believe that energy prices are going to continue to confound most everyone. The coupling and de-coupling of oil to and from the stock market, respectively has become too unpredictable to try to harness. However, given the back and forth seen in prices over the past month as a floor may have been put in oil prices, there may be some opportunity in considering a pairs trade, such as Marathon Oil (NYSE:MRO) and United Continental (NYSE:UAL).

United Continental and other airlines have essentially been mirror images to the moves in oil, although not always for clearly understandable reasons, as the relative role of hedging can vary among airlines, although United has reportedly closed out its hedged positions and may be a more pure trading candidate on the basis of fuel prices..

While it’s not too likely that either of these stocks will move in the same direction concurrently, the short term volatility in their prices and the extremely appealing premiums may allow the chance to prosper in one while awaiting the other’s turn to do the same.

The idea is to purchase shares and sell calls of both as a coupled trade with the expectation that they would be decoupled as oil rises or falls and one position or another is either rolled over or assigned, as a result. The remaining position is then managed on its own merits or possibly even re-coupled.

As with earnings related trades that I make that are usually agnostic to the relative merits of the company, focusing only on the risk – reward proposition, this trade is not one that cares too much about the merits of either company. Rather, it cares about their responses to the unpredictable movements in oil price that have been occurring on daily and even on an intra-day basis of late.

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

Double Dip Dividend: BGC Partners (2/26), McDonalds (2/26), SanDisk (2/26)

Premiums Enhanced by Earnings: Hewlett Packard (2/24 PM), The Gap (2/26 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.

Feb72015

Weekend Update – February 8, 2015

Weekend Update Comment

There’s not too much doubt that this past week had a character that was very different from nearly every week that had preceded it thus far in 2015, which has been predominated by sad faces.

The problem encountered in January and helping to create a sea of sad faces is that we were all expecting to begin seeing evidence of an improving economy. That kind of anticipation timed along with what we often believe to be a traditionally positive January market easily set the stage for disappointment.

The narrative that seemed so logical and convincing included more jobs, higher wages and newfound personal wealth due to slashed energy prices. The problem, though, was that when the time came for corroborating data to take the narrative into the realm of non-fiction it just wasn’t on the same page.

Retail Sales weren’t what we were expecting and neither was the GDP. Manufacturing data was falling and the early results from earnings season were less than stellar, as good news failed to materialize or coalesce into a coherent story in support of the narrative.

However, this past week caught glimpses of good news to come, as some prominent national retailers provided improved guidance that was finally in line with the theory that we had come to accept as gospel. Finally there was some indication that lower energy prices were going to result in more discretionary spending. What was especially encouraging was that the improvement on the retail side was no longer being confined to the more luxurious end of the spectrum.

I preferred this week’s “happy face” version of 2015, even if the week did end on a little bit of a down note after a day that featured a near flawless “Employment Situation Report,” that included some sizeable revisions to previous months.

In a perfect example of the concept that “as an investor and a consumer you can not have your cake and eat it, too” the market went higher, but so did 10 Year Treasury rates and energy prices, but within reason that can be a good trade-off.

2015 has been pretty dizzying thus far. All you have to do is take a look at an S&P 500 chart since having reached market highs at the end of December 2014. It doesn’t take long to realize that market tests have been coming at a far greater frequency or on a more compressed time frame than they had been coming in almost 3 years.

The good news is that the alternating plunges and surges are creeping into option premium pricing for those selling. The bad news is that the alternating plunges and surges are creeping into option premium pricing for those buying.

The activity seen in 2015 will lead some to believe that it demonstrates the market’s resilience, while others will be less optimistic and point out that large moves higher, as have been commonplace in 2015 are typically seen in or approaching bear markets.

Fortunately, we will have hindsight to guide us.

Until that point that hindsight kicks in there is the problem of deciding whether it’s a smiling face or a sad face that awaits in the near future.

With the otherwise under-appreciated JOLT Survey, which Janet Yellen has said held increasing importance as it may indicate workforce optimism and another Retail Sales report coming this week, there may be more reason to add to the trickle of evidence that may validate last week’s happy faces.

Of course, while official government reports and data are certainly meaningful, despite a propensity toward revision, the really meaningful data may start coming in just a few weeks. At that time the major retailers begin to release their earnings. Perhaps more importantly than those earnings ending in December 2014, they will have also had 2 additional months of observation to either validate or negate the narrative and also provide changed forward guidance.

I have my “happy face” mask within easy reach, although the sad face is never far away.

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

One of the reasons that I like Fastenal (NASDAQ:FAST) so much is that it is prone to large and decisive movements, but is otherwise a fairly staid stock that has a nice habit of seeing its price revert toward the mean.

Fastenal reported good earnings just a few weeks ago, but this past week reported weaker than expected January sales resulting in another of those decisive movements that rippled through to its competitors, as well.

The hindsight tool indicates that over the past few years these kind of drops from about the $45 level have proven to be a good time to purchase or add shares. While only offering a monthly options contract there are now only 2 weeks remaining on the February 2015 cycle. However, during the 10 occasions that I have owned shares in the past 18 months I’ve held them through only a single monthly option cycle just once, so it does tend to be a longer holding.

While “old tech” was weak last weak and Microsoft (NASDAQ:MSFT) has been weak since releasing its earnings, a nearly 10% drop seems excessive, but a welcome return to a price level last seen 6 months ago.

Among my favorite kind of option contract sales, but ones that I only infrequently get to execute, are for those going ex-dividend on a Monday. In such cases, early assignment has to occur on the previous Friday. If selling an option contract expiring the same week as the ex-dividend date and shares are assigned early to capture the dividend, the contract seller won’t get the dividend, but does get an additional week of premium and a return of cash from the assignment which can then be re-invested to generate more income.

Microsoft shares go ex-dividend on Tuesday February 17th, the day after the Presidents Day holiday. That means if an option contract is to be exercised early it must be done on the preceding Friday and may offer one of those opportunities to benefit whether the option is exercised early or not.

Royal Dutch Shell (NYSE:RDS.A) also goes ex-dividend this week. While oil was nearly 10% higher for the week and may reasonably be expected to undergo some short term profit taking, as too many have foregone their bearish sentiment, Royal Dutch Shell’s decision to decrease its capital expenditures is just another in the steps necessary to nudge the supply-demand equilibrium toward a balance favoring price.

The process, however, unless there is an unexpected event or change in policy, such as Saudi Arabia cutting production in exchange for Russia’s support of the Syrian regime, is a slow one. I would, therefore, look at a holding in Royal Dutch Shell to be of a longer term nature and the absence of weekly options removes some of the risk of short term volatility.

However, if it’s volatility that you’re looking for, then Market Vectors Gold Miners ETF (NYSEARCA:GDX) may be just the thing, as precious metals has seen a very clear increase in its volatility and has trickled down to the level of the miners.

Over the past 2 months this has been one of my favorite trades as I’ve rolled over existing positions numerous times, sometimes more than once in a week and even electing to rollover when assignment was nearly certain in order to keep deriving income from the holding.

As seen this past week and nearly every week in the past 2 months these shares can move up and down very quickly, but for those who believe that precious metals or some proxy should be in the speculative portion of their portfolio, this may be a suitable addition, especially as uncertainty abounds in stocks, bonds, currencies and metals.

While I only have room for one energy sector position, Marathon Oil also goes ex-dividend this week and has reasons to be considered.

While its dividend is far below that of Royal Dutch Shell, it has also suffered a far greater decline from its recent high level. While I think that decline near its end, it does have earnings to report on February 18, 2015, a week after its ex-dividend date.

Marathon Oil (NYSE:MRO), unlike Royal Dutch Shell does offer weekly option contracts providing opportunities to focus on either or both events by selecting different expiration dates. In the case of Marathon, as we’ve seen with many others in the energy sector reporting their earnings, the reality has been better than the fears and shares have done well in the aftermath. With that in mind I look at Marathon as potentially offering a good dividend and upside potential from earnings, in addition to an option premium that;’s enhanced by the upcoming earnings as well as the added volatility surrounding energy names.

International Paper (NYSE:IP) also is ex-dividend this week and while it is near its 52 week high and 20% higher from its earnings release in October 2014, its near term prospects don’t appear to hold a return to that level. Instead, I think that there is still room for some capital appreciation, or at least continuing to trade in its recent range, while offering the opportunity to accumulate premiums.

The company has been very shareholder friendly with spin-offs, increasing share buybacks and dividend increases in each of the past 5 years. That’s a nice combination for those who need something to offset the lack of excitement in its actual businesses.

After announcing record earnings, but weak forward guidance, shares of Activision Blizzard (NASDAQ:ATVI) briefly suffered a sharp fall. However, when there was some opportunity to really evaluate the increased share buyback announced and the increased dividend analysts dismissed the importance of the lowered guidance and shares recovered.

Other than experiencing some currency headwinds, margins on its products are expected to increase as it its share of digital download revenues. After all, what is a “millennial” going to spend their newly found cash on if not gaming? In return, Activision may have some upside share potential supported by its buyback and a nice option premium to help atone for the adventure that may await with share ownership.

Finally, what’s a day without the report of a new cyber-hack and the theft of personal data? Last week’s report of a massive and successful attack of a healthcare insurer, that made away with personally identifying data and not just credit card numbers, may be the start of massive headaches for many in the 14 states served by that insurer who may find that joining the witness protection program and changing their name and date of birth may be the best remedy.

While retaining FireEye (NASDAQ:FEYE) after the hack isn’t terribly different from closing the barn door a little too late, it certainly raises the profile of companies in the cyber-security arena even higher.

FireEye reports earnings this week and if you only looked at a 6 month chart you would think that it had done well in scratching its way back toward its August 2014 level. However, a look beyond 6 months shows just how far shares have fallen in the past year.

The option market is implying an 11.7% move upon earnings and based on past history that may be an under-estimate of what may be possible. However, one may be able to obtain a 1% ROI by selling a weekly put option at a strike level that is about 15.7% Friday’s closing price.

However, since shares are already up about 12% in the past week, I would consider the sale of puts only if there is a meaningful price decline prior to earnings, or if that doesn’t occur, if there is a significant decline after earnings, as FireEye has disappointed in the past and it’s a fickle stock market that has to decide whether the past is more important than the future.

Traditional Stocks: Fastenal

Momentum Stocks: Activision Blizzard, Market Vectors Gold Miners ETF

Double Dip Dividend: International Paper , Marathon Oil (2/11), Microsoft (2/17), Royal Dutch Shell (2/11)

Premiums Enhanced by Earnings: FireEye (2/11 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.

 

Oct182014

Weekend Update – October 19, 2014

Weekend Update Comment

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now in its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 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.

May122013

Weekend Update – May 12, 2013

Weekend Update

There’s certainly no way to deny the fact that this has been an impressive first 4 months of the year. The recently touted statistic was that after 4 months and one week the market had gone up 13%.

To put that into the perspective the statistic wanted you to have, the statistical factoid added that for all of 2012 the market was up only 7.2%. That certainly tells you not only how impressive this gain has been but how 2013 will undoubtedly leave 2012 in the dust.

What is left unmentioned is that in 2012, in a period of only 3 months and 1 week the market was up 12.9%.

What happened? Could that happen again? Those are questions asked by someone who turned cautious when the market was up less than 8% in 2013 and wasn’t adequately cautious in 2012.

SInce 1970, the S&P 500 has finished the year with gains of greater than 14% on a total of 16 occasions, so there could easily be more to come. That can easily be a justifiable perspective to hold unless you also look at the margins by which 14% was exceeded. In that event, the perspective becomes less compelling. It’s still possible to end the year substantially higher than 14%, just not as likely as such a great start might suggest.

But remember, statistics don’t mislead people. People mislead people.

There was little to no substantive news this past week as the market just continued on auto-pilot. If you owned shares of any of the stocks that had super-sized moves after earnings, such as Tesla (TSLA) or Green Mountain Coffee Roasters (GMCR), that was news enough. But for the rest of us it was quiet.

What was interesting, however, was the behavior of the market during the final hour of Thursday’s trading.

That period marked a turnaround sending the market quite a bit lower, at least based on recent standards when only higher seems to be the order of the day. Initially, the drop was ascribed to a strengthening of the dollar and further drop in gold. Those, however, had been going on for a while, having started earlier in the trading session.

What came to light and whose timing was curiously coincident with the market change in direction was a rumor of a rumor that someone from within JP Morgan (JPM) was suggesting that the Federal Reserve was ready to begin tapering its Treasury purchases, those signaling the beginning of an end to Quantitative Easing.

For the growing throng that believe that QE has been responsible for the market’s climb higher, life after QE couldn’t possibly be rosy.

First comes an errant AP Tweet, then an unconfirmed rumor of a rumor. Those incidents would seem to indicate vulnerability or at least an Achilles heel that could stand in the way of this year becoming the 17th in the list.

Easily said, but otherwise, there’s really not much else on the radar screen that appears poised to interfere with the market’s manifest destiny. Unless of course, Saturday’s Wall Street Journal report that the Federal Reserve has indeed mapped out a strategy for winding down QE, transforms rumor into potential reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details). Additionally, as the week unwinds, I may place relatively greater emphasis on dividend paying stocks and give greater consideration to monthly contracts, in order to lock into option premiums for a longer period in the event that 2012 is the order of the day.

This week’s selections seem to have more healthcare stocks than usual. I know that healthcare may have already run its course as it was a market leader through the first 4 months of 2012, but some individual names haven’t been to the party or have recently fallen on hard times.

Amgen (AMGN) didn’t react terribly well following its recent earnings report, having fallen 6%. That’s not to say that it hadn’t enjoyed a nice gain in 2013. However, it does offer an attractive short term option premium, despite also being ex-dividend this week. That’s a combination that I like, especially when I still remain somewhat defensive in considering opening new positions.

Eli Lilly (LLY) is also trading ex-dividend this coming week. It has under-performed the S&P 500 this year, but still, a 10% gain YTD isn’t a bad four months of work. It has fallen about 7% since reporting its most recent quarter’s earnings.

Merck (MRK) isn’t joining the ex-dividend parade this week, but will do so during the June 2013 option cycle for those a little more long term oriented than I typically tend to be. However, during a period of having repositioned myself defensively, the longer term options have utility and can provide a better price cushion in the event of adverse market moves.

I’ve owned shares of Conoco Phillips (COP) only once since the spin-off of its refinery arm, Phillips 66 (PSX). It used to be a very regular part of my portfolio prior to that occasion. The parent certainly hasn’t fared as well as the child in the 15 months since Phillips 66 has traded as a public company. The 80% difference in return is glaring. But like so many stocks, I think Phillips 66 isn’t priced for a new purchase, while Conoco Phillips represents some opportunity. Additionally, though not yet announced, there should be a dividend forthcoming in the next week or two.

I don’t recall why I didn’t purchase shares of Marathon Oil (MRO) last week after a discussion of its merits, but it probably had to do with the limited buying I was doing across the board. It reported earnings last week, perhaps that was a risk factor that didn’t have commensurate reward in the option premiums offered. But this week, with that risk removed, it goes ex-dividend and the consideration begins anew.

Although I already own shares of JP Morgan, I would consider adding to that position. Regardless of what your opinion is on the issue of separating the roles of Chairman and CEO, there’s not too much disagreement that Jamie Dimon will forever be remembered as one of the supporting pillars during and in the immediate aftermath of our financial meltdown. The recent spate of diversions has kept JP Morgan from keeping pace with the S&P 500 during 2013, but I believe it is capable of cutting that gap.

Autodesk (ADSK) reports earnings this week and is down about 4% from its recent high. I often like to consider earnings trades on shares that are already down somewhat, however, shares are up quite a bit in the past 3 weeks. While the options market was implying about a 6% move upon earnings, anything less than a 7% move downward could offer a 1.1% option premium for the week’s exposure to risk.

Salesforce.com (CRM) is another of those rare companies that haven’t kept up with market lately. That’s been especially true since its recent stock split. Although it does offer a an attractive weekly premium, the challenge may lie the possibility that shares are not assigned as the May 2013 option cycle ends, because earnings are reported during the first week of the June 2013 cycle. Barring a large downward move prior to earnings, there would certainly be ample time to re-position with another weekly or even monthly option contract prior to earning’s release.

To round off my over-exposure to the technology sector, I may consider either adding more shares of Cisco (CSCO) or selling puts in advance of this week’s earning’s report. I’ve added shares in each of three successive weeks and don’t believe that Cisco’s earnings will reflect some of the woes expressed by Oracle (ORCL). My only personal concern is related to the issue of diversification, but for the moment, technology may be the sector in which to throw caution to the wind.

US Steel (X) has been one of those stocks that I’m not terribly happy about, although that really only pertains to the current lot that I hold. Along with pretty much everything in the metals complex, US Steel hasn’t fared very well the past few months. However, I think that I am ready for a resurgence in the sector and am hoping that the sector agrees with me, or at least continues to show some strength as it has this past week.

Finally, despite having owned Facebook (FB) since the IPO and currently owning two individual lots, priced at $29 and $27.17, it remains one of my favorite new stocks. Not because I can count on it going to $30, but because I can count on it staying in a reasonable pricing neighborhood and becoming a recurrent stream of option income.

Traditional Stocks: Cisco, Conoco Phillips, Merck, Salesforce.com

Momentum Stocks: Facebook, US Steel

Double Dip Dividend: Amgen (ex-div 5/14), Eli Lilly (ex-div 5/14), Marathon Oil (ex-div 5/14)

Premiums Enhanced by Earnings: Autodesk (5/16 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.

 

May52013

Weekend Update – May 5, 2013

Weekend Update

ADP. ISM. FOMC. ECB

They came one after another at us last week. Not to mention the Jobless Report and the Employment Situation Reports to end the week.

Following the previous week where I had temporarily gone on one of my wild and drunken spending ways buying new shares with assignment proceeds, I returned to a more cautious note this past week.

Maybe it was the soup. While I have much greater comfort when on a shopping spree, usually borne out of a bullish view of the world, this week even the comfort food was sending me some kind of misleading message, spoonful after spoonful. I don’t always listen to my soup, but when I do, I know that things are serious. This week’s message wasn’t exactly cryptic in nature. For certain, the message wasn’t “Buy, Buy, Buy.”

But to simply assume the message is correct is bordering on lunacy, so I just decided not to buy quite as much, proving that we can all get along. Besides, “sell, sell, sell,” seemed so draconian.

Although so often a drastically sharp move downward comes from unexpected or lightly regarded catalysts, there’s not too much of an excuse to overlook some potentially obvious catalysts when the market appears to be in an overbought condition. For me, already sensitized to a possible drop, the FOMC, ECB and Employment Situation were individually capable of initiating and speeding a sudden descent.

Aligned? Had the Federal Reserve given a strong hint of an end to Quantitative Easing, had they suggested an earlier timetable for interest rate hikes, or had the European Central Bank not lowered rates that combination had the makings of a nasty punch. Throw a second successive month of disappointing employment numbers, perhaps with downward revisions of previous months and now you’ve got a party.

For short sellers, at least.

While the market did have a slightly delayed reaction to the FOMC minutes, it was fairly mute, despite doubling the early losses. The following day, which is often the day the real action occurs after an FOMC meeting, had its tone already set earlier by the ECB decision to drop rates.

That just left Friday, with a little hint from Wednesday’s release of the ADP statistics. that job growth may be slowing due to some headwinds in the economy. Much of the talk on Wednesday was how fearful everyone was that the number on Friday would be terribly negative.

The fact that the number was, in fact, an indication of a growing economy and there were massive upward revisions to earlier months was the surprise that should never have been a surprise, as thesis changing revisions are routine.

So all of the important letters were aligned, as no one really cares about ISM, and there was reason for a party. The order of the day on Friday was “buy, buy, buy,” once again delaying the “Sell in May” crowd’s ascent and giving me cause to reflect as the majority of my monthly covered call positions are now in the money and do not stand to further profit in the event of a continued market rise.

Of course, if I wanted to continue the lunacy, I would simply rationalize it all and convince myself that I now have a nice cushion between share and strike prices to withstand a fall between now and May 18, 2013. Sooner or later my call for a significant market drop will have to take on broken clock qualities.

Yet, the rationalizations aren’t working. Maybe I need another spoonful of soup.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, despite earnings season still going strong (see details). Additionally, this week the emphasis is once again on dividend paying stocks and still giving greater consideration to monthly contracts, in order to lock into option premiums for a longer period in order to ride out any pauses in the runaway train. Of course, after Friday’s run higher capping off a week when the S&P 500 moved 2% higher, good luck finding any bargain priced shares. Bargains may be justifiably so. Sometimes there’s a reason no one asks you to dance. You just refuse to look in the mirror, justifiably so.

I jumped the gun a bit on Friday afternoon and purchased shares of Pfizer (PFE). After a very impressive share run higher, which hasn’t really occurred in the post-Viagra era, Pfizer reported earnings last week and continued the weakness that immediately preceded the report, after some European regulatory disappointments. A case of too much and too fast from my perspective, but the shares appear as a reasonably low risk over the coming weeks, particularly with a safe and healthy dividend and an upcoming ex-dividend date this week.

Wells Fargo (WFC) has been a frequent purchase target. While I do like shares, it along with so many others is more expensive than I would like. However, it has proven resilient in defending its share price when tested and the test levels have been slowly climbing higher. That’s certainly a more healthy way to see appreciation and I think offers less risk in what may become a risky environment. Additionally, their new ad campaign, “At least we’re not JP Morgan” (JPM) speaks volumes with regard to superfluous risk. As often before, my entry point is not so coincidentally synchronized with an ex-dividend date.

Weyerhauser (WY) is not a stock that I buy very often, but in hindsight I wonder why. Not because it does anything spectacular, but rather because it is so unspectacular that it has the core requirements of being an ideal covered call stock. It generally trades in a narrow range, has an options premium that is more than symbolic and pays a competitive dividend. What’s not to like, especially this week as it also goes ex-dividend.

Although I don’t have any “PEE” selections this week, Marathon Oil (MRO) does report earnings on May 7, 2013. However, unlike the usual earnings related plays that I prefer, it isn’t expected to trade in a wide range after the announcement. It’s implied move is far less than the 10% or greater that I usually look for while still offering a 1% ROI. Instead, it’s just like any other stock that happens to be reporting earnings, except that it’s approximately 5% off of its recent high, satisfying another of the criteria I look for when considering the risk associated with trading around earnings season.

I already own shares of St. Jude Medical (STJ) at a price slightly higher than Friday’s close. I rarely think about adding additional shares unless the price has had a significant drop. However, St. Judes Medical has had a fall relative to the market and certainly to the heath care sector. I don’t envision it as being at undue risk in the event of a market downturn, due to its modest existence during the upturn.

Parker Hannefin (PH) and W.W. Grainger (GWW) both go ex-dividend this week. Although their share rise on Friday adds to some reluctance to add them to the portfolio next week, if the Employment Situation statistics and the revisions are any guide, there may be very good reason to suspect that industrials and the companies that support the industrials may be ready for a little bit of a resurgence. Neither offer incredibly exciting dividends, but share appreciation may be more a part of the equation than it is for most stocks that I consider due to their option and dividend income potential.

I’ve been looking for a re-entry point in Goldman Sachs (GS) for a while. Again, hindsight told me that may have been a couple of weeks ago as shares were a relative bargain. The fact that shares have greatly under-performed the S&P 500 over the past 12 weeks has appeal for me, as I believe it marks a company that may be better equipped to out-perform going forward, particularly in a downturn.

Finally, Abercrombie and FItch (ANF) is an always exciting stock to own, especially as earnings are approaching. In this case earnings aren’t expected until May 15, 2013, so there is a little bit of breathing space to consider shares before the added volatility kicks in. When it moves, the moves are spectacular and certainly the option premiums reflect that kind of risk. My bias at the moment is that if an opportunity will arise it will likely take the form of put sales. However, that is only something that I would do if emotionally prepared to hold shares going into earnings if assigned. If so, a bit of luck may be necessary to turn the tables and sell call contracts going into earnings or sell additional puts if you’re really adventurous.

Traditional Stocks: Goldman Sachs, Marathon Oil, St. Jude Medical

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: W.W. Grainger (ex-div 5/9), Parker-Hannefin (ex-div 5/8), Pfizer (ex-div 5/8), Wells Fargo (ex-div 5/8), Weyerhauser (ex-div 5/8)

Premiums Enhanced by Earnings: none

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.