Weekend Update – September 1, 2013

Behind every “old wives’ tale” there has to be a kernel of truth. That’s part of the basis for it being handed down from one generation to the next.

While I don’t necessarily believe that the souls of dead children reside in toads or frogs, who knows? The Pets.com sock puppet was real enough for people to believe in it for a while. No one got hurt holding onto that belief.

The old saw “Sell in May and go away,” has its origins in a simpler time. Back when The Catskills were the Hamptons and international crises didn’t occur in regular doses. There wasn’t much reason to leave your money in the stock market and watch its value predictably erode under the hot summer sun back in the old days.

Lately, some of those old wives’ tales have lost their luster, but the Summer of 2013 has been pretty much like the old days. With only a bare minimum of economic news and that part of the world that could impact upon our stock market taking a summer break, it has been an idyllic kind of season. In fact, with the market essentially flat from Memorial Day to Labor Day it was an ideal time to sell covered options.

So you would think that Syria could have at least waited just another week until the official end to the summer season, before releasing chemical weapons on its own citizens and crossing that “red line,” that apparently has meaning other than when sunburn begins and ends.

Or does it?

On Monday, Secretary of State John Kerry made it clear where the United States believed that blame lay. He used a kind of passion and emotion that was completely absent during his own Presidential campaign. Had he found that tone back in 2004 he might be among that small cadre of “President Emeritus” members today. On Friday he did more of the same and sought to remove uncertainty from the equation.

Strangely, while Kerry’s initial words and intent earlier in the week seemed to have been very clear, the market, which so often snaps to judgment and had been in abeyance awaiting his delayed presentation, didn’t know what to do for nearly 15 minutes. In fact, there was a slightly positive reaction at first and then someone realized the potentially market adverse meaning of armed intervention.

Finally, someone came to the realization that any form of warfare may not be a market positive. Although selling only lasted a single day, attempts to rally the markets subsequently all faded into the close as a variant on another old saying – “don’t stay long going into the weekend,” seemed to be at play.

That’s especially true during a long weekend and then even more true if it’s a long weekend filled with uncertainty. As it becomes less clear what our response will be, paradoxically that uncertainty has led to some calm. But at some point you can be assured that there will be a chorus of those questioning President Obama’s judgment and subsequent actions and wondering “what would Steve Jobs have done.”

John Kerry helped to somewhat answer that question on Friday afternoon and the market ultimately settled on interpreting the message as being calming, even though the message implied forceful action. What was clear in watching the tape is that algorithms were not in agreement over the meaning of the word “heinous.”

With the market having largely gone higher for the past 20 months the old saying seeking to protect against uncertainty during market closures has been largely ignored during that time.

But now with uncertainty back in the air and the summer season having come to its expected end, it is back to business as usual.

That means that fundamentals, such as the way in which earnings have ruled the market this past summer take a back seat to “events du jour” and the avalanche of economic reports whose relevance is often measured in nano-seconds and readily supplanted by the next bit of information to have its embargo lifted.

This coming week is one of great uncertainty. I made fewer than the usual number of trades last week and if i was the kind that would be prone to expressing regret over some of them, I would do so. I expect to be even more cautious this week, unless there is meaningful clarity introduced into the equation. While wishing for business as usual, that may not be enough for it to become reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and , Momentum categories, with no suitable “PEE” selections this week (see details).

While I currently own more expensive shares of Caterpillar (CAT), I almost always feel as if it’s a good time to add shares. Caterpillar has become everyone’s favorite stock to disparage, reaching its peak with famed short seller Jim Chanos’ presentation at the “Delivering Alpha Conference” a few weeks ago. as long as it continues trading in a $80-$90 range it is a wonderful stock for a covered call writing strategy and it has reliably stayed in that range.

Joy Global (JOY) reported its earnings last week and beat analysts estimates and reaffirmed its 2014 guidance. Nonetheless it was brutalized in the aftermath. Although already owning shares I took the opportunity to sell weekly put options in the belief that the reaction was well overdone.

If the reports of an improving Chinese economy are to be believed, and that may be a real test of faith, then Joy Global stands to do well. Like Caterpillar, it has traded in a reasonably narrow range and is especially attractive in the $48-53 neighborhood.

eBay (EBAY) is simply on sale, closing the week just below the $50 level. With no news to detract from its share price and having traded very well in the $50 -53 range, it’s hard to justify why it fell along with other stocks in the uncertainty that attended the concerns over Syria. It’s certainly hard to draw a straight line from Syria related fears to diminished earnings at eBay.

By the recent measure that I have been using, that is the comparison to the S&P 500 performance since May 21, 2013, the market top that preceded a small post-Ben Bernanke induced correction, eBay has well underperformed the index and may be relatively immune from short term market pressure.

Baxter International (BAX) is one of those stocks that I like to own and am sad to see get assigned away from me. Every job has its negative side and while most of the time I’m happy seeing shares assigned, sometimes when it takes too long for them to return to a reasonable price, I get forlorn. In this case, timing is very serendipitous, because Baxter has fallen in price and goes ex-dividend this week.

Coach (COH) also goes ex-dividend this week and that increases its appeal. At a time when retail has been sending very mixed messages, and at a time when Coach’s position at the luxury end is being questioned as Michael Kors (KORS) is everyone’s new darling, COach is yet another example of a stock that trades very well in a specific range and has been very well suited to covered option portfolios.

In general, I’ve picked the wrong year to be bullish on metals and some of my patience is beginning to wear thin, but I’ve been seeing signs of some stability recently, although once again, the risk of putting too much faith into a Chinese recovery may carry a steep price. BHP Billiton (BHP) is the behemoth that all others bow to and may soon receive the same kind of fear and respect from the potash industry, as it is a prime reason the cartel has lost some of its integrity. BHP Billiton also goes ex-dividend this week and is now about 6% below its recent price spurt higher.

Seagate Technology (STX) isn’t necessarily for the faint of heart. but it is down nearly 20% from its recent high, at a time when there is re-affirmation that the personal computer won’t be disappearing anytime soon. While many of the stocks on my radar screen this week have demonstrated strength within trading ranges, Seagate can’t necessarily lay claim to the same ability and you do have to be mindful of paroxysms of movement which could take shares down to the $32 level.

While Seagate Technology may offer the thrills that some people need and the reward that some people want, Walgreen (WAG) may be a happy compromise. A low beta stock with an option premium that is rewarding enough for most. Although Walgreen has only slightly under-performed the S&P 500 since May 21st, I think it’s a good choice now, given potential immunity from the specific extrinsic issues at hand, particularly if you are under-invested in the healthcare sector.

Another area in which I’m under-invested is in the Finance sector. While it hasn’t under-performed the S&P 500 recently, Bank of New York Mellon (BK) is still about 7% lower in the past 5 weeks and offers a little less of a thrill in ownership than some of my other favorites, JP Morgan Chase (JPM) and Morgan Stanley (MS). Sometimes, it’s alright giving up on the thrills, particularly in return for a competitive option premium and the ability to sleep a bit sounder at night.

Finally, with the excitement about Steve Ballmer finally leaving Microsoft (MSFT) after what seems like an eternity of such calls, the share price has simply returned to a more inviting re-entry levels. In fact, when Ballmer announced his decision to leave the CEO position in 12 months, I did something that I rarely do. I bought back my call options at a loss and then sold shares at the enhanced share price. Occasionally you see a shares appreciation outstrip the appreciation in the in the money premium and opportunities are created to take advantage of the excitement not being reflected in future price expectations.

At the post-Ballmer excitement stage there is still reason to consider share ownership, including the anticipation of another dividend increase and option premiums while awaiting assignment of shares

Traditional Stocks: Bank of New York Mellon, Caterpillar, eBay, Microsoft, Walgreen

Momentum Stocks: Joy Global, Seagate Technology

Double Dip Dividend: Baxter International (ex-div 9/4), BHP Billiton (ex-div 9/4), Coach (ex-div 9/5)

Premiums Enhanced by Earnings: none

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

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Dividends

I received a very nice text message from a subscriber this morning.

I think that if I’m ever in the market for a publicist for Option to Profit, my search need go no further.

His message, in its entirety was “Option to Profit: Come for the premiums, stay for the dividends.”

My guess is that he’s been seeing a stream of dividends coming in lately. Today alone had Lorillard, Weyerhauser and Molson-Coors.

Some of you know that I have mixed feelings about dividends and am not really a big fan.  (I Don’t Understand Dividends and The Myth of Dividends) but as long as there appear to be some pricing inefficiencies in option premiums when dividends are about to be paid (Double Dipping Dividends), why would you want to pass up that opportunity?

I’ve been increasingly putting an emphasis on dividends as market volatility has declined, in order to increase over all yield and I have to admit that I don’t mind receiving those brokerage alerts telling me when a dividend check has been deposited into my account (Dividends? Forget DRIP and Go PRIP).

Because of my belief in attempting to exploit those pricing inefficiencies when they appear is why I send out queries on ex-dividend mornings for those positions that were in the money at the time of going ex-dividend. It’s all about collecting the data and validating the strategy and the information that so many of you regularly provide is very helpful and appreciated.

I’ve been looking for a good way to express the OTP portfolio’s dividend yield for a while but it’s difficult to really get a good fix and one that accurately depicts the reality, especially if seeking to project annual return.

Since I like to compare everything to the S&P 500 Index, it makes sense that I do the same for dividend yield.

Currently the average S&P 500 stock offers a 2.06% dividend yield. However, that is impacted by the 82 stocks in the index that pay no dividends.

So for the 412 dividend paying stocks in the index, the average yield is 2.46%. In 2012 the average dividend paying stock had a 2.7% yield. The current year’s lower yield reflects generally higher stock prices.

If you look at the Weekly Performance spreadsheet you may have noticed for the past two months or so some calculations on each page that assesses dividend yield of open positions and projects that yield on an annual basis.

I had not been planning on saying anything about those spreadsheet scribblings until the end of the year, until having received this morning’s message.

The good news is that with increased data collection the model for creating projections is beginning to resemble reality.

The better news is the reality.

The dividend yield for positions closed in 2012, all 272 of them was 2.9%

Thus far the yield for positions closed in 2013 is 2.7%

Both of those reflect all positions and not just those paying dividends. As a result the gap is 0.7% and in a very favorable direction.

At the moment, not including new purchases this week, the remaining open positions in the OTP portfolio are delivering an annualized dividend yield of 2.9%, again that includes both dividend and non-dividend paying positions.

For those that are a bit more traditional than I am and have long appreciated dividends I finally see your perspective as those account credits have been adding up.

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Weekend Update – August 25, 2013

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

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

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

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

 

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Daily Market Update (August 21, 2013 Reprint)

 

  

(see all trades this option cycle)

 

Daily Market Update – August 21, 2013 (Close)

Yesterday was the 45th anniversary of the Warsaw pact nations invasion of Czechoslovakia.

That’s not ordinarily something that I use an an introduction to a Daily Market Update, but bear with me. After all, it’s Wednesday and that’s usually a slow trading day for us. The early market action didn’t give any reason to think that this Wednesday would be different from any other.

Except that today we sit and await the release of the FOMC minutes in an era when the Federal Reserve has taken on new transparency and current members are suggesting that even more transparency may be warranted.

45 years ago on that date, my family and I were supposed to leave Hungary, where we had been vacationing, having returned to the country we left across a land-mined border in the middle of the night twelve years earlier. Hungary, a member of the Warsaw Pact, a member Soviet Union satellite nation had only recently allowed those who escaped during the 1956 Revolution to return as tourists, once they realized that tourist dollars weren’t in conflict with dogma.

Our visas, which were absolutely necessary for travel, as was reporting your itinerary to local authorities, were due to expire on that date.

Funny thing, though. The airport was closed.

There were fighter jet planes flying overhead and we were turned back by soldiers who wouldn’t allow entry onto the road leading to the airport. My parents were smart enough to know not to ask questions. Questions required answers and that was considered to be information.

If Seinfeld had existed in Hungary the certainly would have been a character intoning “No information for you.”

Returning to the hotel, the clerk asked for our visas and before we knew it the police were at the hotel threatening to have us arrested for over staying our visas, suggesting that perhaps we were spies.

The American Embassy could provide no information. Why were the airports closed? When could we leave? They knew, but in a land where information was so tightly controlled they couldn’t be seen as the source of a leak that would have preceded any official local government spin.

They did tell us that all borders were sealed and informed us that we could stay at the embassy if our request for visa extensions wasn’t granted.

An embassy worker suggested a “gratuity” could get us an extension and it did. My father later told others who had been denied that the equivalent of about two dollars would buy a visa extension.

Back in the hotel lobby, television pre-empted its usual airing of the endless loop of “The Flintstones” episodes to play patriotic kind of music. Forget about trying to get a newspaper that gave out any kind of information. Not only were the borders sealed, but so was all flow of information and so were people’s mouths.

Three days later we were allowed to leave and arrived in Paris. It was there that we saw images of Soviet and Warsaw Pact tanks on overhead televisions in the airport, but we still had no clue as to what was happening. It looked as if it was World War II kind of archival footage.

But the International Herald Tribune told the story. The “Prague Spring” as it had become known under the liberalization of Alexander Dubcek was crushed, just as Poland and Hungary had their brief attempts to rid themselves of Soviet yoke crushed.

It is absolutely amazing at how a government can entirely control our access to information. I don’t know how long it took for normal Hungarian citizens to learn what had been going on next door to them, but they certainly didn’t talk about it on the streets while it was all unfolding.

So why am I recalling old news of 45 years ago? Mostly because Eddy Elfenbein of “Crossing Wall Street” fame made note of the anniversary and suggested I write a post. I had let the day just slip by, never giving it a thought.

Now we’re awash in information. The one-time opaque Federal Reserve is now like your best friend telling you more than you need to know or more than you can understand. But you have to be right there when that friend spills all, because you need to know before any of your other friends.

Government reports, ADP, Tweets, blogs, Instagram and an endless supply of other sources of information with the only gatekeeper being the one who is supposed to ensure that all get equal access to its release, give or take a few nano-seconds, for give or take a few million.

If Hampton Pearson, the usual purveyor of information on CNBC had it in him to give away the minutes in exchange for blow and hookers, society might be better off having a chance to chew over the information rather than reflexively responding to it.

The problem has become one of interpretation of news. Keeping the population ignorant of the news is one thing, but an over-flow of news is far better because it creates a new kind of ignorance, one that has its genesis in too many competing and often contradictory bits of data that cause us to proceed irrationally or haphazardly and sometimes bounce from one action to the next without a coherent plan.

In a society where information is strictly controlled or parceled, there isn’t much in the way of interpretation necessary. You simply knew that the truth was diametrically opposite of the official version.

This afternoon will come word by word parsing of the FOMC minutes. Although this month is likely to be a non-event, much like last month, the interpretations can differ wildly and the markets can go into spasms from too much attention being paid to the details.

In the meantime we continue to get conflicting earnings reports and alternating positive and negative market reactions to the news. Just think about the  names mentioned yesterday. Anadarko, Intel, Chesapeake Energy and add to those Home Depot, JC Penney and others and see how quickly their fates are altered with the flow of information and the parsing of that information. It can make the difference between putting a $250 price tag on Apple or placing a $700 target. Same information, yet two disparate interpretations.

So often the net result of that flow of information is minimal change, but a wide range of reaction. Just look at the immediate reaction to the release of the FOMC minutes this  afternoon. Someone or their algorithm interpreted the minutes in a negative manner, sending the market down an additional 70 points in 5 minutes, only to see it then add 130 points in the next 40 minutes.

Increasingly, I’m beginning to believe that being in an information vacuum has its merits. At the very least ignoring the party line, taking note of the jets flying above and having a goal that is immutable.

 

 

 OTP Sector Distribution* as of August 21, 2013

  * Assumes equal number of shares in positions

Intraday versions of the Daily Market Update are not archived. You may access prior day’s Daily Market Updates by clicking here

The posting of these trades is not a recommendation to initiate positions nor to execute any trading positions, as they may represent time sensitive actions.



 







Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see ROI statistics on all new, existing and closed positions on a daily updated basis

 

 WEEKLY TRADING SUMMARY

NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/ PUTS EXPIRED CALLS EXPIRED/ PUTS ASSIGNED CLOSED
8  / 8 3 0 0 / 0 0 / 0 0

 

, ,

 

 

   

 

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Weekend Update – August 18, 2013

I believe, although I could be mistaken, that an original version of the Bible suggested that “an octogenarian shall lead them.”

Last week I was wondering where the next catalyst was going to come from.

After a couple of years of headline grabbing events and man made disasters such as “Fiscal Cliff” and “Sequestration,” it was actually good to have a summer off. We didn’t even have the obligatory Greek banking crisis this August. The downside, of course, is that there’s nothing to react toward. Instead, stocks have had to trade on such fundamentals and basics as valuation and earnings. As with many traditions, there are fewer and fewer people who can remember the origins of such things.

If you can remember back almost a year, Apple (AAPL) was just hitting $700/share and it was the reason you could have discounted the other 499 stocks that comprised the S&P 500. As went Apple, so went the health of the overall market.

It was a simpler time.

Things have changed, but then came news that Carl Icahn had put together a “large” Apple position. Then came word the Leon Cooperman, Chairman of Omega Advisors, was equally ebullient about Apple.

Its shares immediately shot up an immediate $22 upon a simple Icahn Tweet. The “Cooperman Bump” was good for another 2%, but he’s much younger.

Wonderful. We needed market leadership and Apple was ready to take the reigns once again thanks to a couple of guys who have a combined 147 years between them. Can George Soros be far behind? Based on what his ownership had done for JC Penney (JCP) shares before he curiously added 2 million shares during the course of his divorce from a much younger Bill Ackman, you would probably prefer that he kept his distance if you were long Apple shares.

As it turns You can’t predicate an entire market on the basis of a nearly octogenarian investor’s lust for overseas cash piles. While Apple piled up even more cash reserves, it also added on to its share value while the market had a recently rare triple digit move downward and just came off its worst week in 2013.

That wasn’t supposed to happen. He was supposed to lead us to a better place where we know only of profits, dividends and buybacks. A place where we are always renewed and bathed in truth.

For me the market starts anew every week as I scan to see what positions have been assigned due to the sale of call options. As occasionally happens when a monthly cycle ends my world is essentially recreated, but you never know where the truth lies. What I do know is that far fewer of my positions were assigned this week than I had expected, even with the gift of Icahn.

With continually competing voices citing reasons we go higher matched off with equally compelling reasons we go lower, the standoff is as old as that between good and evil, but suddenly evil is looking stronger.

While it may seem inviting to have an octogenarian activist lead the way, the greatest likelihood is that such a shepherd has his own interests more at heart than that of his willing flock.

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

While my preference ordinarily is to focus on selling weekly options, given some uncertainty last week, I may look to sell more monthly contracts as a defensive measure in the event of a short term downturn.

In the past year the astute have noted that “as goes Google (GOOG), so does Apple not follow,” as the prevailing thesis was that it was not possible to be invested in them concurrently. While recent attention has deservedly shifted to Apple as it’s price moved higher on news of a new iPhone and then Icahn’s position, so too has attention shifted away from Google.

I haven’t owned shares of Google in more than a year and even though it has advanced steadily since then, its recent 6% decline is enough to get me interested once again. With the next lower support level nearly $100 away the risk may be greater than the underlying “beta” might suggest, but perhaps at any sign of Apple infatuation cooling we all know where the money has to be going.

If you have the stomach for such things JC Penney reports earnings this week. I own shares, including some bought just this week and subsequently assigned. However, had you asked me a few weeks ago, I would have believed that JC Penney comparative quarter results were going to be very positive. But once the high profile dissension from Bill Ackman, calling for a speedy appointment of a permanent CEO became known and that short term melodrama played itself out, my opinion changed considerably. It would seem unlikely that such internal controversy would arise before a surprisingly good earnings report.

However, for the adventurous selling puts expiring August 23, 2013 can return an 1.3% ROI and leave you without the need to own shares if a post-earnings related drop ends up being less than 25% The options market is anticipating a 17.5% decline.

Among the walking wounded this week was Macys (M). I’ve been waiting a long time for an opportunity to own shares again, although those opportunities usually come when bad news is at hand. In this instance it was the same as had wounded numerous others this earnings season. With no other distractions during a quiet late summer people actually pay attention to such mundane things as earnings and guidance. In this case, they didn’t like what they heard, but that has by and large been the lot of retailers of late. Under the leadership of Terry Lundgren you do have to believe that if any retailer will be able to pull out from underneath the doldrums, it will be Macys.

Another of my favorite retailers, especially coming off price weakness, like most everything this past week, is Coach (COH). However, as with many of the stocks in this week’s listing, the challenge is whether what appears to be value pricing is instead, a value trap, as an overall declining market takes the good along with the bad lower. With an almost 14% drop since its earnings, Coach has had a head start on any general decline which gives me some solace if investing new funds.

Following Cisco’s (CSCO) disappointing earnings report, which may have added fuel to the market’s weakness, the technology sector didn’t fare terribly well. John Chambers, the CEO has alternated from genius to out of touch and back to genius in the span of just a few years, but may now be returning to the “out of touch” category in the eyes of some.

However, for me, he evoked an image of Hoard Schultz, chairman of Starbucks (SBUX), who a number of quarters ago following a brutal reaction to a disappointing earnings report, provided one of the most ardent defenses of his company and why the reaction was so wrong. If you had faith in Schultz, you were well rewarded. I think Chambers offered a similar post-earnings response and despite te immediate concerns there is reason for following his zeal.

Oracle (ORCL) on the other hand, may offer a better return, based upon the option premiums which may reflect an earnings report near the end of the September 2013 option cycle. It’s often difficult to distinguish its CEO, Larry Ellison, from its product, but he was in the news this week with sometimes less than flattering comments about Apple and Google. The last times Oracle disappointed with its earnings reports Ellison didn’t follow the Schultz lead and instead, pointed fingers. WHile I may be looking for more monthly options during this week’s trading activity, an Oracle trade may be an exception.

Among the vanquished last week was Seagate Technology (STX). It’s 27% decline, however started in mid-July. I owned shares the previous week and they were assigned. Seagate is another position that I would strongly consider as a candidate for weekly option sales, particularly if using deep in the money strikes.

McGraw Hill FInancial (MHFI) goes ex-dividend this week and has been on a nice ride ever since the initial reaction to news that their role in the financial meltdown was to be investigated. In fact, it recently surpassed that point from which it fell off the cliff upon the news. Normally that would be a warning signal for me, however, shares have recently scaled back 5%. I think that McGraw Hill was unduly punished by the market and still, in fact, has catching up to do, despite its great run since February 2013, when there was a near immediate realization that the reaction was well overdone.

I’m a little ambivalent about adding additional shares of Transocean (RIG to my two existing lots. Just a few days earlier I felt reasonably assured that the $47 lot would be assigned. At that time I was already thinking of re-purchasing shares in order to capture the upcoming dividend. Also in the Icahn stable of companies in his radar scope, Transocean hasn’t fared quite as well as others, and has not yet increased its dividend as Icahn suggested, although its change has come to its executive offices. Together with Halliburton (HAL) and British Petroleum (BP), Transocean is one of the “Evil Troika” that consistently offers a good place to park money owing to its narrow trading range, option premiums and dividend payout.

Finally, although Mosaic (MOS) has appeared in each of the past two weekly articles, its selection never gets old as long as it keeps doing what it has so reliably done ever since news of the dismantling of the potash cartel became known. In this case, what it has done after suffering a 20% plunge is to slowly begin raising the bar higher as questions arise regarding the ability of the cartel to stay asunder. For the past three weeks I’ve erased substantial paper losses by adding shares and selling in the money calls whose premiums are enhanced by fear and uncertainty of what tomorrow will bring. The pattern that Mosaic has been taking is essentially two steps forward and one step back and that is just perfect for executing a serial covered call strategy that hopefully follows shares back

Traditional Stocks: Cisco, Google, Macys, Oracle

Momentum Stocks: Coach, Mosaic, Seagate Technology

Double Dip Dividend: McGraw Hill FInancial (ex-div 8/22 $0.28), Transocean (ex-div 8/21 $0.56)

Premiums Enhanced by Earnings: JC Penney (8/20 AM)

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

 

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Carl Icahn Spells the End of an Era at Apple

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s where Carl Icahn comes in.

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

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

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

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

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

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

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

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

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

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

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

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

 

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Week in Review (August 5 – 9, 2013 Reprint)

 

Option to Profit Week in ReviewAugust 5 – 9, 2013 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
7 / 8 1 3 4 / 1 0 / 0 0

    

Weekly Up to Date Performance

August 5 – 9, 2013

For the week, new purchases returned to its usual ways and well exceeded the time adjusted S&P 500 in a week that the market had a negative tone, but still showed great resilience.

New positions beat the adjusted index by 2.7%, and also bested the unadjusted index by  an even larger 3.1%.  But just as I used JC Penney as an excuse last week for trailing the overall market, this week’s results are skewed by having used a number of September 17, 2013 option contracts. That actually added almost 1% to the results.

Adjusting for time, to a standard weekly observation period the week’s new positions beat the adjusted S&P 500 by 1.7% and the unadjusted index by 2.1%.

The market showed an adjusted loss of  0.6% for the week, while the unadjusted S&P 500 lost 1.1%.  New purchases gained 2.1% for the week, well above the threshold, even when adjusting for extended options.

For positions opened in 2013 and subsequently closed, performance exceeded that of the S&P 500 by 0.5%. They are up 2.7% out-performing the market by 20.6%.

Well, this week was more like it, although I’m still upset about JC Penney, particularly the silence this past week regarding its vendor’s lending facility remains unanswered. Besides that, the soap opera was amusing and at least offered a brief window to sell some call options as Bill Ackman helped to temporarily raise share price by being Bill Ackman. Of course that only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.

Additionally, it was a week where we may have gotten a message that things aren’t as dour in China as we have believed. For me, that would be wonderful, because much of my 2013 thesis was based on better than expected outcomes from China. So far, that hasn’t been a good call, but I remain patient (and stubborn).

But otherwise, this was a week that demonstrates why a weak or declining market may have value and benefit that if alternating with an advancing market can create returns well in excess of the apparent net.

For much of 2013 that hasn’t been the case as alternating markets just haven’t been the norm as they usually are.

Every now and then when I need confirmation that sometimes the sum of the parts is far greater than the whole I look at historical returns and remind myself that a stock doesn’t have to move anywhere in order to be a profit generating machine.

Lately I’ve been looking for confirmation with great regularity.

As much as it’s convenient to try and read into this week’s weak performance, it’s probably not a good idea to do so.

With the August 2013 option cycle expiring next Friday, I’m simply hopeful that the market will maintain enough integrity to see many positions assigned.

That was also my hope at the end of June, but the Federal Reserve got in the way and prices dropped just in time to help reduce the number of assignments, so I’m not counting on anything.

Since I’m not reading much into the lack of strength this week, I still plan to follow the same pattern as with the past two months, looking to reduce cash from about 40% to 25% over the course of the week.

The question and where I’ve been varying the approach recently is deciding between weekly or monthly contracts when both are available.

I do want to have weekly contracts in the mix because they form the basis for cash flow necessary to both replenish cash reserves and fund new investments,  if they’re assigned.

Now, the really big news is that next week’s first new position will be the 500th since expanding the service from being shared among only a small group of insiders to opening it up to outside subscribers 15 months ago.

Thank you for making it possible and providing reason to continue an implausible venture

Initially intended to provide a basis for subscribers to “graduate” after a few months, and the Informational web site continues to list that as the objective, a large core of subscribers have been here for all 499 trades.

That level of trust and confidence, together with the comments I receive are incredibly gratifying (as are the subscription fees).

Thank you. Looking forward to the next 500.

 

 

 



This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):



New Positions Opened:  ANF, GMCR (puts), FL, LO, MOS, MRO, PSX, WNR

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  CAT

Calls Rolled over, taking profits, into extended weekly cycle: none

Calls Rolled over, taking profits, into the monthly cycle:  WNR, X

Calls Rolled Over, taking profits, into a future monthly cycle:  none

Calls Rolled Up, taking net profits into same cyclenone

Put contracts sold and still open: none

Put contracts expired: GMCR

Long term call contracts sold:  none

Calls Assigned:  ANF, EBAY, MOS, STX

Calls Expired:  none

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions:  AAPL (ex-div 8/8 $3.05), BP (ex-div 8/7 $0.54), INTC (ex-div 8/5 $0.22), STX (ex-div 8/25 $0.38)

Some did report early assignment of AAPL (which was expected), in addition to early assignment of INTC (which was not expected). The early assignment of INTC was a small minority, while the number reporting early assignment of AAPL was more sizable, but less than a majority of respondents.



For the coming week the existing positions have lots that still require the sale of contracts:   CLF,  DE, FCX,  INTC, JCP, MCP, MOS, PBR, SHLD, WLT, WY, X (See “Weekly Performance” spreadsheet or PDF file)



* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.



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Weekend Update – August 11, 2013

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum, with no “PEE” selections this week. (see details).

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related news. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (MOS) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

Premiums Enhanced by Earnings: none

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

 

 

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Weekend Update – August 4, 2013

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 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.

 

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