Mar102013

Weekend Update – March 10, 2013

Weekend Update

It only seems fitting that one of the final big stories of the week that saw the Dow Jones eclipse its nearly 6 year old record high would be the latest reports of how individual banks performed on the lmost recent round of “stress tests.” After all, it was the very same banks that created significant national stress through their equivalent of bad diet, lack of exercise and other behavioral actions.

Just as I know that certain foods are bad for me and that exercise is good, I’m certain that the banks knew that sooner or later their risky behavior would catch up with them. The difference is that when I had my heart attack the effects were restricted to a relatively small group of people and I didn’t throw any one out of their homes.

Having had a few stress tests over the years myself, I know that sometimes the anticipation of the results is its own stress test. But for some reason, I don’t believe that the banks that were awaiting the results are facing the same concerns. Although I’m only grudgingly modifying my behavior, it’s not clear to me that the banks are or at least can be counted to stay out of the potato chip bag when no one is looking.

Over the past year I’ve held shares in Goldman Sachs (GS), JP Morgan Chase (JPM), Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Morgan Stanley (MS), still currently holding the latter two. They have been, perhaps, the least stressful of my holdings the past year or so, but I must admit I was hoping that some among that group would just go and fail so that they could become a bit more reasonably priced and perhaps even drag the market down a bit. But in what was, instead, a perfect example of “buy on the rumor and sell on the news,” success led to most stressed bank shares falling.

The other story is simply that of the market. Now that its surpassed the 2007 highs it just seems to go higher in a nonchalant manner, not giving any indication of what’s really in the works. I’ve been convinced for the past 2 or three weeks that the market was headed lower and I’ve taken steps for a very mild Armageddon. Raising cash and using longer term calls to cover positions seemed like a good idea, but the only thing missing was being correct in predicting the direction of the market. For what it’s worth, I was much closer on the magnitude.

The employment numbers on Friday morning were simply good news icing on the cake and just added to my personal stress, which reflected a combination of over-exposure to stocks reacting to speculation on the Chinese economy and covered call positions in a climbing market.

Fortunately, the news of successful stress test results serves to reduce some of my stress and angst. With news that the major banking centers have enough capital to withstand severe stresses, you do have to wonder whether they will now loosen up a bit and start using that capital to heat up the economy. Not to beat a contrarian horse to death, but since it seems inevitable that lending has to resume as banking portfolios are reaching maturity, it also seems inevitable that the Federal Reserve’s exit strategy is now in place.

For those that believe the Federal Reserve was the prime sponsor of the market’s appreciation and for those who believe the market discounts into the future, that should only spell a market that has seen its highs. Sooner or later my theory has to be right.

I’m fine with that outcome and would think it wonderfully ironic if that reversal started on the anniversary of the market bottom on March 10, 2009.

But in the meantime, individual investment money still has to be put to work. Although I continue to have a negative outlook and ordinarily hedge my positions by selling options, the move into cash needs to be hedged as well – and what better way to hedge than with stocks?

Not just any stocks, but the boring kind, preferably dividend paying kind, while limiting exposure to more controversial positions. People have their own unique approaches to different markets. There’s a time for small caps, a time for consumer defensive and a time for dividend paying companies. The real challenge is knowing what time it is.

As usual, this week’s selections are categorized as being either Traditional, Momentum or Double Dip DIvidend (see details). As earnings season is winding down there appear to be no compelling earnings related trades in the coming week.

Although my preference would be for shares of Caterpillar (CAT) to approach $85, I’m heartened that it didn’t follow Deere’s (DE) path last week. I purchased Deere and subsequently had it assigned, as it left Caterpillar behind, for the first time in 2013, as they had tracked one another fairly closely. With the latest “news du jour” about a Chinese government commitment to maintaining economic growth, there may be enough positive news to last a week, at which point I would be happy to see the shares assigned and cash redeployed elsewhere.

Along with assigned shares of Deere were shares of McGraw Hill (MHP). It’s price spiked a bit early in the week and then returned close enough to the strike price that a re-purchase, perhaps using the same strike price may be a reasonable and relatively low risk trade, if the market can maintain some stability.

There’s barely a day that goes by that you don’t hear some debate over the relative merits of Home Depot (HD) and Lowes (LOW). Home Depot happens to be ex-dividend this week and, unless it causes havoc with you need to be diversified, there’s no reason that both companies can’t be own concurrently. Now tat Lowes offers weekly options I’ve begun looking more frequently at its movement, not just during the final week of a monthly option cycle, which coincidentally we enter on Monday.

I rarely find good opportunity to purchase shares of Merck (MRK). It’s option premium is typically below the level that seems to offer a fair ROI. That’s especially true when shares are about to go ex-dividend. However, this week looks more appealing and after a quick look at the chart there doesn’t appear to be much more than a 5% downside relative to the overall market.

Macys (M) is another company that I’ve enjoyed purchasing to capture its dividend and then hold until shares are assigned. It’s trading about 6% higher than when I last held shares three weeks ago and is currently in a high profile legal battle with JC Penney (JCP). There is certainly downside in the event of an adverse decision, however, it now appears as if the judge presiding over the case may hold some sway as he has suggested that the sides find a resolution. That would be far less likely to be draconian for any of the parties. The added bonuses are that Macys is ex-dividend this week and it too has been added to the list of those companies offering weekly option contracts.

Cablevision (CVC) is one of New York’s least favorite companies. The distaste that people have for the company goes well beyond that which is normally directed at utilities and cable companies. There is animus director at the controlling family, the Dolans, that is unlike that seen elsewhere, as they have not always appeared to have shareholder interests on the list of things to consider. But, as long as they are paying a healthy dividend that is not known to be at risk, I can put aside any personal feelings.

Michael Kors (KORS) isn’t very consistent with the overall theme of staid, dividend paying stocks. After a nice earnings related trade a few weeks ago and rise in share price, Kors ran into a couple of self-made walls. First, it announced a secondary offering and then the founder, Michael Kors, announced a substantial sale of personal shares. It also may have more downside potential if you are one that likes looking at charts. However, from a consumer perspective, as far as retailers go, it is still” hot” and offers weekly options with appealing enough premiums for the risk. This turned out to be one of the few selections for which I couldn’t wait until the following week and sent out a Trading Alert on Friday morning.

Seagate Technology (STX) is another theme breaker. In the past I have had good fortune selling puts after price drops, which are frequent and sudden. The additional downside is that when drops do come, the recoveries are relatively slow, so patience may be required, as well as some tolerance for stress if selling puts and the price starts approaching the strike.

The final theme buster is Transocean (RIG). Is there anything that Carl Icahn is not involved with these days? Transocean has been a frequent trading vehicle for me over the years. Happy when weekly options became available, I was disappointed a few weeks ago when they disappeared. It is part of the “Evil Troika” that I often own concurrently. If purchased, Transocean will once again join British Petroleum (BP) in the portfolio, replacing Halliburton (HAL) which was assigned on Friday. Transocean has re-instituted the dividend, although it will still be a few months until the first such payment. Icahn believes that it is too little and too late. I don’t know how he would have the wherewithal to change the “too late” part, but most people would be happy with the proposed 4+% dividend.

Traditional Stocks: Caterpillar, Lowes

Momentum Stocks: McGraw Hill, Michael Kors, Seagate Technology, Transocean

Double Dip Dividend: Cablevision (ex-div 3/13), Home Depot (ex-div 3/12), Macys (ex-div 3/13), Merck (ex-div 3/13)

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.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Mar62013

Google is a Bargain

Articles

How many times have you heard the expression that “everything is relative?”

Certainly, when it comes to the price of anything, on some level a determination is made of its relative value. It can be a complicated process combining objective and subjective measures and is often re-assessed in hindsight.

That latter part is especially true with stock purchases. Buying and selling stocks that should be a simple exercise as you don’t really need to deal with intangibles, such as emotion, fear and the specter of a collapse of the Euro. At least not if you believe that the P/E ratio is a fair measure of value and a simple means by which to make comparisons. It would also helped if absolutely everyone agreed with you in that regard.

Barely a year ago it seemed as if all attention and all excitement was focused on Apple (AAPL) and what kind of price targets it could breach in its unstoppable ride. How often did analysts refer to Apple’s price movement as something unique and special?

As Apple is now having some difficulty living up to those lofty expectations it really shouldn’t come as much of a surprise that it has hit a wall faced by other invincibles of past. Being unique and special is not all that unique if history is a guide. I did my best to suggest that in a number of Apple-centric articles in the past 6 months. While history suggests that Apple will fall even further it gives reason to suspect that Google will march significantly higher.

Let’s go to the charts.

Just look at what happened to some of its sector mates about a dozen years ago. Whether Cisco (CSCO), Microsoft (MSFT) or Intel (INTC), their charts all look very similar. Although the 200,000% increase in shares of Cisco at its peak may be an outlier, Microsoft experienced a 57,000% climb, while Intel and Apple had 18,800% and 21,400% increases from their opening day close trades.

While Cisco, Microsoft and Intel all experienced their high points during the technology bubble, Apple waited the same dozen years to begin resembling the pattern of its Silicon Valley neighbors. Coincidentally, that was the length of time that Steve Jobs was estranged from Apple, before his return following the purchase of Next Computer by Apple.

By the standards of a decade ago, Apple’s share price may still have some way to go to match Microsoft’s 60% drop, Intel’s 74% retreat or Cisco’s 76% plunge. Thus far, with its recent low of $420, Apple has fallen 40% from its 2012 peak. All you need to do is slide its representation on the charts above or below over to the left 12 years and see how nicely they superimposes with the others.

But then there’s Google (GOOG). The company that’s feared, has moved into everyone’s space, is willing to fail, yet somehow garners little respect and attention. Even as it achieved its trading highs, surpassing the $800 level, analysts downplayed the achievement. Instead of discussing the juggernaut that Google is and its expansive vision, the price increase has widely been attributed to people trading out of Apple and into Google. Those are the same people that downplay market rallies by saying that it occurred on light volume. If your banker doesn’t ask about the white powder on your deposits, they’re not likely to ask if they were the result of light volume.

Google simply isn’t really generating the same kind of excitement as Apple did just a year ago. No one has even thought Google deserved an utterance of the “Law of Large Numbers” as a reason why it would have difficulty in continuing its climb.

 

Granted, Google didn’t start it’s first day of trading as a sub-$10 stock, so it is a bit more difficult to achieve a 200,000% gain. To do so, its share price would have to advance to approximately $200,000, although it could conceivably split its shares on the order of the 288 fold times that Microsoft has done. While Cisco only had to climb to $22 to increase its share price 100% after it opened for trading, Google had to climb $108 for that distinction. At $838 it is currently up less than 700% from its closing trade on its IPO day in 2004.

700%? That’s nothing by relative standards. That is the poor section of Atherton, barely even good enough to step foot into Palo Alto. Besides, even Johnson & Johnson (JNJ) was able to mount that kind of appreciation in a nine year period beginning in the mid-1980s. By historical standards there’s nothing rarefied about Google’s performance.

Certainly, by no relative measure is Google over-extended. Further, Google’s mettle has been tested and it has shown its leadership qualities. Although Google fell more than the others during the market meltdown beginning in 2007, its descent started later and ended earlier. In fact, Google started its climb back more than three months before the market bottom, having advanced more than 40% in those months preceding the market nadir.

While Apple had out-performed Google in both the periods from the October 2007 peak and the March 2009 bottom, Google has handily beaten the others.

Google’s most recent advance began November 15, 2012, moving forward 20.3%. Coincidentally, the S&P 500’s march higher (13.6%) began on November 15, 2012.

Yet the Google chart looks nothing like that of its one time glorious and subsequently fallen neighbors.

 At this point all it has done is to return and mildly surpass its 2007 peak price.

Once ad click money truly started flowing in Google has always taken the opportunity to try new and exciting ventures, most of which have been scuttled or perpetually stayed in beta. While small in the scope of the enormously growing enterprise, under the leadership of Larry Page the ventures are increasingly bold and increasingly poised to create meaningful revenue streams in addition to the growing annuity that ad click revenue has become. Even if no meaningful or immediate direct revenue is recognized from a venture, Google is a disruptor in the market place and is able to soften the underbelly of a potential competitor. Just ask Apple.

With a growing cash horde and a dividend in its inevitable future, Google has already one upped Apple with its proposed, albeit controversial, stock split. Arguably, the series of stock splits that Microsoft, Intel and Cisco undertook helped to fuel their stock appreciation and Google is still on the ground floor in that regard, standing to benefit from the illusory increase in value.

Most of all, Google is still such a relatively young company that is just learning to walk. Granted, it is doing so during a very different era than did its counterparts, but even by Apple’s modest 18,000% growth, which was not artificially fueled by the technology boom, Google has plenty of room to still return incredible profits to new investors, if it follows the script that has been played out by others.

Finally, I would be negligent, and certainly not mindful of my own history, to not suggest that there are covered option opportunities always available with Google. Although I do not currently own shares, Google has been a frequent source of premium income for me over the past 6 years. With extended weekly options now available as well, there are many choices among strike prices and contract length that both price bulls and bears can find appealing. Even those thinking that there may be no more than an 8% drop by April 20, 2013 can get a !% ROI for their pessimism. For those with a tighter price range the rewards can be substantial if Google stays within that range.

Google is also always an exciting play upon earnings announcement. Of course the premature announcement of two quarters ago was more excitement than many would want to repeat, especially, RR Donnelley (RRD), but Google is a frequent candidate for the “Premiums Enhanced by Earnings” strategy, either through covered calls or put sales, whether its shares move up or down. Seeking to take advantage of its historically large earnings related moves may be a good, and fairly conservative mechanism to find an entry point for those not currently holding shares.

I’ll be looking forward to earnings on April 15th and hope to be in a position to pay a fair share of taxes on the profits the next April 15th.

Mar32013

Weekend Update – March 3, 2013

Weekend Update

Sequester This.

Despite being a reasonably smart guy, I’ve never understood how to play the game of “craps.” It’s too fast, there are too many possible decisions and when you get right down to it, it’s name is probably based on something that aptly describes something you’d rather not touch or taste. A name like that should serve as fair warning to stay away. Sometimes a glance at the people playing the game sends the same message.

Not that a word like “sequester” is any better. The very sound of “sequestration” makes me want to cringe as I think about what my poor dachshund had to endure. It’s probably almost as bad as what the individual investor has to endure on a maddeningly frequent basis as markets whipsaw for no apparent reason, yet there’s never a shortage of reasons to explain the unexplainable. At least the dog never required an explanation and eventually went on his way, fully healed from the experience. I can’t say the same thing about my portfolio.

The events that spurred the past week’s early sell-off was by all accounts equal parts Italy, Federal Reserve and Sequestration. Later in the week, as the market was knocking at the gates of 2007’s record levels it was Italy, the Federal Reserve and the lack of interest in the Sequestration that were responsible for the turn of events.

What’s not to understand?

Just a few months earlier the new year’s gains were said to be due to averting the Fiscal Cliff. You may or may not recall the gyrations the market took as competing elected officials decided to vent and spew as they raised and then dashed hopes of a meaningful resolution and simply played craps with other people’s portfolios. Since we’ve all learned that ethical guidelines regarding investment portfolios of elected officials are rather lax, you had to wonder just how the “house” odds were stacked in their game of craps.

This time around as the Sequestration deadline loomed the market just kept chugging along higher. It’s hard to understand that as it seems that there can only be a downside, regardless of whether a resolution is reached or not, unless it becomes clear that there really is no danger posed by this thing they’ve called “The Sequester.”

It seems odd that many are taking great pains to paint frightening and untenable outcomes if the sequestration becomes reality. Yet no one seems to care. Not the man on the street, who based on his knowledge of geography can’t possibly have any idea of what the sequestration is, nor the markets.

To me, the ultimate game of craps was being played this week, as no one really knows what either outcome to this most recent crisis will bring the economy or the markets. Yet that didn’t stop concerned parties from dueling press conferences and then abandoning Washington, DC prior to the deadline and prior to an agreement. Most of all, it didn’t end money pouring into stocks and pushing them higher and higher.

Couple that uncertainty with the certainty that myriads of people beginning to foam at the corners of their mouths felt as we got tantalizingly closer to the heights of 2007. That’s precisely how storms are created.

Just as there were dueling certainties, we also had dueling countdown clocks this past week. Nothing good ever comes of those clocks, whether for the sequestration deadline or Dow points until 14164.

Option to Profit subscribers know that I’ve been unusually dour the past week or two out of concern for a repeat of 2012’s market month long 9% drop. The course that we’re following currently seems eerily familiar.

With that personal concern it’s somewhat more difficult to select stock picks for the coming week, particularly while also looking for opportunities to raise cash positions in preparation for bargains ahead.

However, as Jim Cramer has long said, “there’s always a bull market somewhere.”

I don’t know if that’s true, but there’s always a strategic approach to fit every circumstance.

In this case, while I strongly favor weekly options, where they are available, concerns regarding a quick and sharp downturn lead me to look more closely at monthly or even longer option opportunities in an attempt to still put money to work but to not be left empty handed after expiration of a weekly contract, while then holding a greatly devalued position. The longer term contracts, although perhaps offering lower time adjusted ROIs, do offer some opportunity to assure premium flow for more than a single week and do allow for greater time to ride out any storms.

The week’s selections are categorized as either Traditional, Momentum, Double Dip Dividend or “PEE” and include a look at premiums derived from selling weekly, remaining March 2013 options or April 2013 options (see details).

Deere (DE) was on my list last week, as well. But like most items on the list last week, it remained unpurchased as my cautionary outlook was already at work. In the past month Deere has already had a fairly big drop compared to the S&P 500. I don’t see very much sequester related risk with a position right now, but Deere does have a habit of getting dragged along with others reacting to bad industrial news.COF

Citibank (C) was also on the list last week, but was replaced by Morgan Stanley (MS) as one of the few trades of the week. Although I’m expecting some market challenges ahead, I don’t believe that the decline will be lead by financials, which have already been week of late. If the sequestration occurs and some of the forecasted job cuts become reality, in the short term, I would expect the credit side of Capital One’s (COF) business to benefit. I’ve had Capital One on my wish list in the past, but haven’t bought shares for quite a while, as its monthly only options premiums were always off putting. Now that there are weekly options available, it seems strange that I’d be looking more toward the security provided by the longer term contracts.

With all of the dysfunction at JC Penney (JCP) and Sears’ (SHLD) ambivalence about its position in retail, Kohls (KSS) is just a solid performer. Its been in the news lately, including the rumor category. My shares were recently assigned, but as earnings are out of the way and price is returning to the comfort range, Kohls, too, is another of the boring, but reliable stocks that can be especially welcome when all else is languishing.

Although I own Williams Companies (WMB) with some frequency, I’m not certain that I can refer to it as one of my “favorites.” It’s performance while holding it is usually middling, but sometimes it’s alright to be just average. Williams does go ex-dividend this week and is also in my comfort zone with its current price.

YUM Brands (YUM) is one of those stocks that seem to have a revolving door in my portfolio. It is probably as responsive to analysts interpretation of events as any stock that I’ve seen and it typically finds its way back to where it started before the poorly conceived interpretations were unleashed on the investing public. I had wanted to pick up shares last week to replace those assigned the week prior, but simply valued cash more.

Praxair (PX) is just a boring company whose big gas tanks are ubiquitous. Sometimes boring companies are just the right tonic, when the stresses of a falling market are prevailing, at least in my mind. Making a dividend payment this week makes it less boring and perhaps it still has enough helium on hand to resist falling.

Pandora (P) reports earnings this week and it is fully capable of moving 25% on that event. At the moment, the options market is factoring in approximately a 16% move. AT it’s current price, I would strongly consider taking chances of receiving a 1+% ROI in return for seeing a 25% or less price drop.

On a positive note, we can draw a parallel from an astute observation from more than a century ago. Since “everything that can be invented has been invented,” there was clearly no future need for the Patent Office. So too, with the passing of the Sequestration, there can be no other unforeseen man made fiscal crises possible, so it should all be milk and honey going forward. Don’t let the higher volatility fool you into believing otherwise.

Traditional Stocks: Deere, Capital One, Kohls

Momentum Stocks: Citibank, YUM Brands

Double Dip Dividend: Williams Company (ex-div 3/6)

Premiums Enhanced by Earnings: Pandora (3/7 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.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.