Weekend Update – September 29, 2013

“There’s always a calm before the storm” is a fairly well known saying that doesn’t always accurately define a sequence of events.

Are all storms preceded by a period of calm? Is calm always followed by a storm?

The predictive capability of a period of calm hasn’t necessarily been validated among meteorological circles.

Being a meteorologist, however, is very similar to being a stock analyst or a market technician. No one really expects you to get it right, because you get it wrong so often. Besides, you would have to be a fool to fully predicate your actions on their prognostications. Neither group tends to publicly sit down and review the signals that had them sending the wrong messages.

Other than that meteorologists often get their wardrobes provided at no cost, while market analysts often get unlimited supplies of antacids. Meteorologists, though often wrong, are still very often beloved by their audience. I’m not certain the same can be said for stock analysts.

This past week was a forgettable one in just about all aspects. It was a week of calm, at least as far as potentially market moving news tend to go. Yet even in the midst of a sea of calm, the market was down over 1% and was unable to hold the 1700 level on the S&P 500, bringing us back to a level last seen about 10 days ago, when all was sunny.

While meteorologists often look to macro events, such as “El Nino,” or even global warming, the macro events that may move our markets are many and varied, but none seem to have paid a call this week. In fact, even factors that in the past sent chills of fear and uncertainty into the hearts of investors, such as a government shutdown or impending default on US obligations, have thus far barely elicited a yawn.

The perfect storm of good news and absence of bad news has simply continued. Aalthough this week was one of relative calm it’s hard to not notice dark clouds on the horizon, most of which are preceded by the fear of “what if.” What if tapering begins? What if the government is shut down? What if there is a government default?

Maybe that’s why Goldman Sachs (GS) just recommended the use of portfolio protective puts and that sentiment was quickly echoed by many that had access to a microphone. Coming in advance of the beginning of the new earnings season it reminds us that the just completed earnings season had few reasons to believe that growth was the trend at hand.

Of course, one could also be of the opinion that with everyone rallying to secure their protective puts this could be the perfect time to prepare for another market move higher.

In an effort to hedge the hedge, I am continuing to keep my cash reserves at relatively high levels but am still confident that with each week there are reasonably attractive trades that have a degree of safety and can create current income streams to help offset any market weakness.

If there is calm ahead, I prefer to look for stocks this week that are somewhat boring and have been trading in a reasonably narrow range. That kind of calm is just the tonic for covered option strategies.

This week the potential stock selections are restricted to the “Traditional” category, as no appealing choices were found in the Double Dip Dividend, Momentum and “PEE” categories this week (see details).

On an otherwise bad day to end the week, Microsoft (MSFT) danced to its own drummer, as Steve Ballmer, the outgoing CEO performed one of his characteristic morale raising dances at what is likely to be the final annual company wide meeting at which he presides. Reportedly, the day’s bump in share price came as the rumor regarding Ford (F) CEO Alan Mulally made the rounds indicating that his interest in assuming the position at Microsoft was strengthening. While it seems difficult to understand the synergy it may simply be another example of the market’s appetite for an anti-Ballmer. But without regard to immediate stories regarding transition in leadership, Microsoft just continues to offer a good combination of option premiums and dividends at this level, as it further commits itself toward creating its own ecosystem, perhaps not with an eye on increasing marketshare, but rather on retaining the loyalty of customers who might otherwise feel the lure of the competition.

While it was a good day for Microsoft it wasn’t a very good day for Intel (INTC). While the past years have seen close correlation between the fortunes of Intel and Microsoft, they certainly diverged this week. Part of the reason was some concern regarding a delay in the start of “Intel TV,” a web based television service which was thought to be a remedy for its poorly diversified revenue sources. Intel has demonstrated some resilience in the $22.50 range and like Microsoft offers a good combination of option premiums and dividends.

I liked Dow Chemical (DOW) enough to buy it last week in the hopes of capturing its dividend and option premium. However, a late afternoon spike in its share price right before going ex-dividend resulted in early assignment of shares. Following Friday’s sharp price decline, it”s right back to where it started. Still attractive, but without the dividend. It stands in sharp distinction to many of the companies that I’ve been considering over the past two months in that it s current share price is higher than where it stood at a recent market top on May 21, 2013 when the market reacted to FOMC minutes and a Ben Bernanke press conference by embarking on a quick 4% decline.

While I liked Deere (DE) last week and almost always find myself liking it, I didn’t purchase shares last week in an attempt to capture the dividend. Sometimes, especially for stocks above $50 the nearest strike prices are too far away from the current share price to offer a premium that offers sufficient reward for the risk undertaken. That was the case last week. However, if the lower prices to close the week hold at the open of this week and remain near the strike, I think the timing may be just right to add shares of Deere.

As far as boring stocks go, Mondelez (MDLZ) is boring in everything other than its name. Even Nelson Peltz’s self-serving attempts to move share price by discussing why he believed it was an ideal take-over target for Pepsi (PEP) did nothing to stir share price in any meaningful or sustained way. That kind of price stability is ideally suited for a covered option strategy.

Retail has been a difficult sector recently, especially teen retail. However, just as Mondelez can make boring become interesting, so too can The Gap (GPS) make boredom the new chique. Well down from a brief earnings fueled rise, shares appear to have support at the $40 level and won’t face the challenge of earnings until mid-way through the November 2013 option cycle. In the interim, it also goes ex-dividend during the October 2013 cycle.

Following its recent earnings related drop Darden Restaurants (DRI) is trading at a much more appealing level. From a covered option trader’s perspective the strike prices below the $50 level, graduated in single dollars is much more attractive and offers many more opportunities than the sparser ones available above $50. While Darden may also be a boring kind of pick it’s interest level is also enhanced by a very nice dividend that comes during the October cycle.

Finally, Barclays (BCS) may have qualified as a “Momentum” selection based on its recent price movements but once the dust settles it should start trading in a more sedate manner. In addition to various legal worries and the backdrop of lethargic European economies, Barclays recently announced the need to meet increased capital reserve requirements. Doing so through the issuance of stock is never a great way to see shares appreciate. However, the issuance of “rights” to existing shareholders entitling them to purchase shares at approximately a 40% discount helped to drive up share price

Traditional Stocks: Barclays, Deere, Darden, Dow Chemical, Intel, Microsoft, Mondelez, The Gap

Momentum Stocks: none

Double Dip Dividend: none

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 – September 22, 2013

Generally, when you hear the words “perfect storm,” you tend to think of an unfortunate alignment of events that brings along some tragedy. While any of the events could have created its own tragedy the collusion results in something of enormous scale.

For those that believe in the wisdom that can be garnered from the study of history, thus far September 2013 has been at variance with the conventional wisdom that tell us September is the least investor friendly month of the year.

What has thus far made this September different, particularly in contrast to our experience this past August, has been a perfect storm that hasn’t come.

Yet, but the winds are blowing.

Barely three weeks ago we were all resolved to another bout of military action, this time in Syria. History does tend to indicate that markets don’t like the period that leads up to hostilities.

Then we learned that the likely leading contender to assume the Chairmanship of the Federal Reserve, Larry Summers, withdrew his name from consideration of the position that has yet to confirm that its current Chairman will be stepping down. For some reason, the markets didn’t like prospects of Larry Summers being in charge but certainly liked prospects of his being taken out of the equation.

Then we were ready to finally bite the bullet and hear that the Federal Reserve was going to reduce their purchase of debt obligations. Although they never used the word “taper” to describe that, they have made clear that they don’t want their actions to be considered as “tightening,” although easing on Quantitative Easing seems like tightening to me.

There’s not too much guidance that we can get from history on how the markets would respond to a “taper,” but the general consensus has been that our market climb over the past few years has in large part been due to the largesse of the Federal Reserve. Cutting off that Trillion dollars each year might drive interest rates higher and result in less money being pumped into equity markets.

What we didn’t know until the FOMC announcement this past Wednesday was what the market reaction would be to any announcement. Was the wide expectation for the announcement of the taper already built into the market? What became clear was that the market clearly continues to place great value on Quantitative Easing and expressed that value immediately.

As long as we’re looking at good news our deficit is coming down fast, employment seems to be climbing, the Presidents of the United States and Iran have become pen pals and all is good in the world.

The perfect storm of good news.

The question arises as to whether any eventual bad news is going to be met with investors jumping ship en masse. But there is still one thing missing from the equation. One thing that could bring us back to the reality that’s been missing for so long.

Today we got a glimpse of what’s been missing. The accelerant, if you will. With summer now officially over, at least as far as our elected officials go, the destructive games have been renewed and it seems as if this is just a replay of last year.

Government shutdowns, debt defaults and add threats to cut off funding for healthcare initiatives and you have the makings of the perfect storm, the bad kind, especially if another domino falls.

Somewhat fortuitously for me, at least, the end of the September 2013 option cycle has brought many assignments and as a result has tipped the balance in favor of cash over open positions.

At the moment, I can’t think of a better place to be sitting as we enter into the next few weeks and may find ourselves coming to the realization that what has seemed to be too good to be true may have been true but could only last for so long.

While I will have much more cash going into the October 2013 cycle than is usually the case and while I’m fully expecting that accelerant to spoil the party, I still don’t believe that this is the time for a complete buying boycott. Even in the middle of a storm there can be an oasis of calm.

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

After Friday’s loss, I have a difficult time in not being attracted to the idea of adding shares of Caterpillar (CAT). It has been everyone’s favorite stock to deride for its dependence on the Chinese economy and for its lack of proactive leadership in the past year. Jim Chanos publicly proclaimed his love for Caterpillar as his great short thesis for the coming year. Since it has trailed the S&P 500 by 16% on a year to date basis there may be good reason to believe that money goes into Caterpillar shares to die.

However, it has been a perfect stock with which to apply a serial covered option strategy. In 13 trades beginning July 2012, for example, it has demonstrated a 44.9% ROI, by simply buying shares, collecting dividends and premiums and then either re-purchasing shares or adding to existing shares. In that same time the index was up 28%, while Caterpillar has lost 3%.

It’s near cousin Deere (DE) also suffered heavily in Friday’s market and has also been an excellent covered option trade over the past year. Enhancing its appeal this week is that it goes ex-dividend. I currently own shares, but like Caterpillar, in smaller number than usual and purchases would provide the additional benefit of averaging down cost, although I rarely combine lots and sell options based on average cost.

Also going ex-dividend this week is Dow Chemical (DOW). This has been one of those companies that for years has been one of my favorite to own using the covered option strategy. However, unlike many others, it hasn’t shown much propensity to return to lower price levels after assignment. I don’t particularly like admitting that there are some shares that don’t seem to obey the general rule of gravity, but Dow Chemical has been one of those of late. I also don’t like chasing such stocks particularly in advance of what may be a declining market. However, with the recent introduction of weekly options for Dow Chemical I may be more willing to take a short term position.

YUM Brands (YUM) is similar in that regard to Dow Chemical. I’ve been waiting for it to come down to lower price levels, but just as it had at those lower levels, it proved very resilient to any news that would send its shares downward for a sustained period. As with Caterpillar, YUM Brands is tethered to Chinese news, but even more so, as in addition to economic reports and it’s own metrics, it has to deal with health scares and various food safety issues that may have little to no direct relationship to the company. YUM Brands does help to kick off the next earnings season October 8th and also goes ex-dividend that same week.

Continuing along with that theme, UnitedHealth Group (UNH) just hasn’t returned to those levels at which I last owned shares. In fact, in this case it’s embarrassing just how far its shares have come and stayed. What I can say is that if membership in the Dow Jones Index was responsible, then perhaps I should have spent more time considering its new entrants. However, with the Affordable Care Act as backdrop and now it being held hostage by Congressional Republicans, shares have fallen about 6% in the past week.

Mosaic (MOS) is among the companies that saw its share price plummet upon news that the potash cartel was collapsing. Having owned much more expensive shares at that time, I purchased additional shares at the much lower level in the hope that their serial assignment or option premium generation would offset some of the paper losses on the older shares. Although that has been successful, I think there is continuing opportunity, even as Mosaic’s price slowly climbs as the cartel’s break-up may not be as likely as originally believed.

If you had just been dropped onto this planet and had never heard of Microsoft (MSFT) you might be excused for believing this it was a momentum kind of stock. Between the price bounces that came upon the announcement of the Nokia (NOK) purchase, CEO Ballmer’s retirement, Analyst’s Day and the announcement of a substantial dividend increase, it has gyrated with the best of them. Those kinds of gyrations, while staying within a nicely defined trading range are ideal for a covered option strategy.

Cypress Semiconductor (CY) goes ex-dividend this week. This is a stock that I frequently want to purchase but am most likely to do so when its purchase price is near a strike level. That’s especially true as volatility is low and there is less advantage toward the use of in the money options. With a nice dividend, healthy option premiums, good leadership and product ubiquity, this stock has traded reliably in the $10-12 range to also make it a very good covered option strategy stock selection.

Every week I feel a need to have something a little controversial, as long as there’s a reasonable chance of generating profit. The challenge is always in finding a balance to the risk and reward. This week, I was going to again include Cliffs Natural Resources, as I did the previous week, however a late plunge in share price, likely associated with reports that CHinese economic growth was not going to include industrial and construction related growth, led to the need to rollover those shares. I would have been happy to repurchase shares, but not quite as happy to add them.

Fortunately, there’s always JC Penney (JCP). It announced on Friday that it was seeking a new credit line, just as real estate concern Vornado (VNO) announced its sale of all its JC Penney stake at $13. Of course the real risk is in the company being unable to get the line it needs. While it does reportedly have nearly $2 billion in cash, no one wants to see starkly stocked shelves heading into the holidays. WHether through covered options or the sale of put options, JC Penney has enough uncertainty built into its future that the premium is enticing if you can accept the uncertainty and the accompanying risk.

Finally, I had shares of MetLife (MET) assigned this past week as it was among a handful of stocks that immediately suffered from the announcement that there would be no near term implementation of the “taper.” The thesis, probably a sound one was that with interest rates not likely to increase at the moment, insurance companies would likely derive less investment related income as the differential between what they earn and what they pay out wouldn’t be increasing.

As that component of the prefect storm is removed one would have to believe that among the beneficiaries would be MetLife.

Traditional Stocks: Caterpillar, MetLife, Microsoft, UnitedHealth Group

Momentum Stocks: JC Penney, Mosaic, YUM Brands

Double Dip Dividend: Cypress Semiconductor (ex-div 9/24), Deere (ex-div 9/26), Dow Chemical (ex-div 9/26)

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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Ellison Fiddles While Oracle Burns

Maybe I belong to a different generation, but I have certain expectations regarding behavior and responsibility, especially when other’s are your subordinates and maybe even extending to your shareholders.

As a short term holding I’ve always looked to Oracle (ORCL) as a potential addition to my portfolio that relies on the use of a covered call strategy.

While I have often thought of buying Oracle shares, in 2013 I’ve only done so twice, this most recent occasion being in advance of its earnings report. In hindsight, however, I wish I had done so much more frequently because of how mediocre its price performance has been.

As a covered option trader I like mediocrity, at least when it comes to share price. That’s the perfect price behavior to be able to buy shares and sell calls or simply sell puts and collect premiums, sometimes dividends and sometimes small capital gains on shares with relatively little fear of large price swings downward. With little movement in underlying shares you can do so over and over again.

Oracle was truly perfect, that is of course, as long as you ignore the two earnings reports prior to Wednesday evening’s numbers being released.

Any company can see its shares tumble after releasing earnings or providing guidance. In fact, it doesn’t even take bad numbers to do so. All it takes is for disappointment or unmet expectations to permeate the crowd. After all, the saying “buy on the rumor and sell on the news” got its start in the aftermath of what would seem like paradoxical behavior from investors.

So I think a company can sometimes be excused for what happens to its shares after earnings.

What I have a harder time excusing is the excoriating finger pointing that came on that occasion six moths ago when Oracle shares plummeted in what appeared to be a company specific issue, as its competitors didn’t fair as poorly in their reports and didn’t suffer similar market misfortunes.

Larry Ellison, the CEO, blamed his salesforce for the quarter. He cited their lack of urgency which allowed third quarter sales to slip into the fourth quarter. I don’t really now how Oracle’s sales force is compensated, but deferring sales is not a typical strategy.

When the next earnings report was released this time Ellison blamed Oracle’s performance on the poor global economic environment, stating “It was clearly an economic issue, not a product, competitive issue,” during the ensuing conference call. That, of course, despite the fact, that once again the competition seemed to not experience the same issues. I guess those sales that previously had been said to slip into this quarter remained slipped.

Surely they would show up for the next earnings report.

AS CEO it’s probably easier pointing fingers at others. That’s certainly the strategy that ruling despots use when there’s a need to deflect criticism or place blame to account for the wheat crop shortage.

At the very least Ellison has at least been visible, perhaps too visible. The world learned of his purchase of 97% of the Hawaiian island, Lanai and wondered at that point whether his attention would be diverted from the job of running Oracle, notwithstanding the presence of its President, Mark Hurd.

He was all too visible recently when referring to Google (GOOG) CEO Larry Page as “acting evil” and questioned the ability of Apple (AAPL) to survive in the absence of Steve Jobs.

In a way, perhaps that kind of presence is preferable to the CEO that fails to make any statements following tragic events on one of his cruise liners, not once, but on two occasions. Maybe Ellison won some new customers over with his goodwill.

But here we were, on the day that Oracle was primed to report earnings yet again. For my money, and I did buy shares on Monday, it was inconceivable to me that someone with as much at stake, especially on a reputational level would allow a third successive disappointing report. Whether by slashing costs, financial optics or perhaps by virtue of those sales that slipped from one quarter to the next and then to this one, I was certain that there would be no repeat of the embarrassing price slides the last two times.

Funny thing, though.

Instead of being an integral part of the earnings report and guidance, Larry Ellison was cheering on the crew of Oracle Team USA in a losing effort at today’s America’s Cup race.

Again, call me old fashioned, but I like to see my CEOs involved in what may have a substantive effect on my fortunes.

The good news is that Oracle didn’t have a meltdown after reporting its earnings. In fact shares went higher until reversing the course when the conference call started and the new disappointments were made known, including guiding significantly lower growth than had been expected.

To give Ellison some benefit of the doubt, perhaps he knew that the initial response would be relatively muted and his presence was unnecessary. Besides, was he going to be able to have credibility going back to the well again and blaming macroeconomic business conditions?

Not with me, he wouldn’t.

With two days to go until expiration of the weekly options I had sold I expect to be able to extricate myself from the position relatively easily and show a profit for the effort.

In all likelihood I’ll also look for any other opportunity to purchase shares because sometimes mediocrity is the gift that just keeps giving. As long as Ellison will be fiddling and paying attention elsewhere, I don’t mind an Oracle that simply treads water and stays in place, although I’m sure that the Larry Ellison of old would never have accepted or allowed that kind of an existence.

Herb Greenberg, of TheStreet.com is once again soliciting nominations for the worst CEO of the year. As far as I know the rules don’t exclude absentee CEOs. While Oracle is only trailing the S&P 500 by approximately 19% YTD and is certainly performing better than other companies with less than capable management, the shame factor is worthy of your vote.

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Weekend Update – September 15, 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

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

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

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

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

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I Bought Apple

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How Much Do I Need to Make Some Money?

How Much is Enough?How much is enough?

I still vividly remember the Tolstoy short story “How Land Does a Man Need?

That story tells of “Pahom” who surprisingly needed much less land than he thought.

Eschewing greed has always been a tenet of the Option to Profit strategy, but I don’t think that it derived from any Tolstoy influence on me during childhood. I was probably influenced by Soupy Sales and The Marx Bothers much more than Tolstoy.

When I was younger, I looked at everything through the lens of the “The 1964 Zenith 25 Inch Color TV” metric. I don’t think that the word “metric” was really a word then, but like “algorithm,” it sounds like you have credibility when you sprinkle casual conversation with those words, especially if you master the art of subliminal suggestion..

G-spot.

In essence, for me the question was always distilled down to “how many Zenith Color TV’s, using 1964 prices, could be purchased with the amount of money in question?”

For standardization purposes, a single such TV was about $500 back then.

I remember when my father was offered a job paying $25,000 a year.

Totally unaware of such mundane things as taxes and other asset drainers, I just looked at that sum as meaning we could buy a new color TV each and every week.

Now, nearly 25 years later, Zenith is gone, your SUV glove compartment is probably bigger than 25 inches and $25,000 isn’t really that much.

So how much do you need?

I started using the covered call strategy and actively trading in and out of positions while I was still getting a regular paycheck. At the time, the income stream was a nice adjunct and I was only devoting about 25% of my portfolio to the strategy.

Now, I don’t work and I’ve devoted 100% of my stock portfolio to the strategy.

Did I mention that my wife, coincidentally, became known as “Sugar Momma” once I devoted myself to plunking my butt on the La-Z-Boy and trading full time?

I’ve always maintained that you can generate 2-4% per month of income from your assets. That shouldn’t be confused with “profit.” My goal is to use my assets to create income, while limiting downside risk in a down market and accepting the fact that my capital gains may be lessened during a bull run.

I’m OK with that.

Even if the market is going down and your portfolio may show paper losses, you can still generate that 2-4% that can become a source of income or “the source of income”

Since I tend to be a conservative guy, let’s make some assumptions.

Firstly, the upper range of the 2-4% return is during periods of market volatility and utilizing near the money option sales. You want higher than 4%, that can be done, too, but you have to also dismiss “fear” as you would need to devote more of your assets to “momentum” stocks or more speculative plays, like Green Mountain Coffee Roasters, Amazon, Netflix and MolyCorp, to name a few. Maybe even those “evil” leveraged ETF’s and ETN’s, such as ProShares UltraSilver and UltraShort Silver, Barclays Volatility ETN and others.

Secondly, the upper range also assumes that most, if not all of your holdings will be hedged, thus creating income streams.

So, now lets assume that it’s not very volatile out there and only 50% of your holdings are hedged and you’re not a momentum risk taking kind of guy.

I’ll call that 1%.

So how big of a portfolio do you need to make a monthly 1% income stream meaningful to you? What is your personal “Pahom” telling you that you need?

Well, let’s not forget to throw the monthly $200 subscription fee in there (once I increase it to that amount).

That means to reach a break even, your portfolio would have to be at least $20,000.

The bad news is that if that’s all you have, you may be in the 1% for income stream, but you’re probably not in the 1% by “Occupy Wall Street” standards.

Beyond that, even if you wanted to put the strategy into effect and accept a 0% income flow, after your subscription costs, $25,000 really isn’t enough to be diversified and have some pricing efficiency, even with your Uncle Vinnie acting as your discount broker.

So, you can easily do the math at different asset levels and different income stream rates.

From my perspective, after expenses, at that 1%, I’d need a $75,000  portfolio to get one new Zenith 25 inch color TV every month.

You may have your own metric.

Obviously, the next question is how much would it take to make a meaningful difference in your life?

I’m also assuming that your investments are discretionary. That is, you’re not playing with money that you may need in a moment of desperation. Those moments always seem to come when you’re stocks are at their low points. There’s nothing worse than taking losses, unless it’s taking losses when you’re arm is being twisted to do so.

Been there. But you’ll have to read “Option to Profit” for the story.

G-spot.

 

 

RETURN HOME

 

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Weekend Update – September 8, 2013

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

Continue reading “Seems Like Old Times” on Seeking Alpha

 

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Microsoft: What Would Munger Do?

For a company that many have said represents nothing but “dead money,” Microsoft (MSFT) has certainly been up and kicking lately.

Fresh off the post-Ballmer resignation news and subsequent rally, Microsoft shares gave back everything in this day’s trading, as it announced plans to purchase its smart phone partner, Nokia (NOK).

Nokia itself is no stranger to having been left for dead, as it’s one-time dominance has seen it eclipsed by Apple (AAPL) in sales, and by others in perceived technological prowess.

In executing a purchase of Nokia it also started speculation that they were in effect “buying” their one-time employee, Stephen Elop, most recently CEO of Nokia, as a prime candidate to be Ballmer’s successor.

I say “most recently” because Elop has stepped down as CEO of Nokia so as not to give the appearance of Nokia actually being the superior party in the deal, in the event that Elop becomes Microsoft’s new CEO.

While Berkshire Hathaway (BRK.A) has no current position in Microsoft, the ties between their founders, Warren Buffett and Bill Gates, respectively, is well know and runs deep, much like a river, which is coincidentally the origin of the name “Nokia.”

Buffett’s less known partner, Charlie Munger, who is almost 90 years old, is rarely in the public eye. He is, however, a legendary investor who takes a back seat to no one. When asked the secret to his success his reply was simply “I’m rational. That’s the answer. I’m rational.”

Today, that seemed to be in short supply, as news came out of Microsoft’s $7.2 Billion deal. The immediate reaction in share price was to drop market capitalization by about $17 Billion.

That seems irrational, perhaps as irrational as a similar increase in market capitalization barely a week ago when Ballmer announced his plans.

WWMD? What Would Munger Do?

For me, that was reason to purchase shares, just as Ballmer’s resignation announcement was reason to sell shares. I was willing to pick up new shares had Microsoft fallen back to $33, never expecting an opportunity to occur so quickly in the absence of a general market meltdown.

As with most of my holdings the Microsoft shares were covered with options. In this case the $33 strike price was eclipsed, but buying back the options at a loss was rational, because the share price accelerated more than did the “in the money” premium. In those rare occasions that I do that, I always sell the shares as soon as the options positions are close. To do otherwise invites the possibility, or with my lick, the probability that the underlying shares will drop just as quickly as they rose, thereby making it a losing proposition all around.

Of course, you might also make the case that you wouldn’t have expected a major deal, such as this one to have occurred under the leadership of a lame duck CEO, but Microsoft is no ordinary company and Steve Ballmer is no ordinary CEO. Whatever talk you may hear about “the law of large numbers,” there is no denying that those large numbers allow you to act with a certain amount of impunity and have a greater long term vision.

That’s the rational thing to do.

Tellingly, the decision to consummate this deal was made without informing ValueAct Capital Management of the decision. The activist shareholder was just informed that they would be receiving a seat on the Board of Directors, but they were not in the loop on this deal. Besides, how rational would it have been to let a 1% equity stake get in the way?

However, even if the Nokia purchase follows in the path of other Microsoft initiatives and its purchase is written off in its entirety, the $7 Billion purchase price is of little significance to Microsoft and presents a far less liability than it seems on the “Surface,” which is in its own liability category.

To start, the funds for this purchase are from cash held overseas. Unless there is a sudden change in United States corporate tax laws, those funds sit idly, reducing the Price to Earnings ratio. The only use for the funds is further overseas investment. The $7 Billion being spent on Nokia represents approximately 10% of Microsoft’s overseas cash. Even if Ballmer goes on a wildly drunken global spending spree it would be incredibly difficult to make a dent in that overseas pile.

For their money Microsoft escapes US taxes and receives tax advantages related to the purchase. The taxes saved alone are approximately $1.5 Billion had they repatriated the money. Additionally any expenses incurred in the United STates further reduce tax liability.

But there is more to the deal to offset the cost that just financial optics and tax engineering. The margins on Lumina units will jump from approximately $10 for software royalties to $50 for hardware. With a projected sale of 30 million units net revenue just increased by $1.5 Billion. Again, in absolute terms that’s not much for Microsoft, but relative to the cost of the Nokia purchase, it is substantial.

What is clear is that what we now think of as smart phones, in some form or another, will evolve into our personal computers. Without a strategy to be part of that evolution money in the bank is insufficient to ensure continued relevance.

Google (GOOG) gets it and secured their foothold with Motorola, a cell phone manufacturer that had also seen better and more heady days, but with a great patent portfolio. Microsoft is now making a commitment to go down a similar path and also securing potentially valuable patents along with the manufacturer of 80% of the Windows OS phones on the market.

I’ve long liked Microsoft because of its option premiums when utilizing a covered call strategy and its recent history of dividend increases. The company is widely expected to announce yet another dividend increase, but even at its current rate of nearly 3% it is far ahead of the mean yield for S&P 500 companies, even when considering only those that pay dividends.

WWMD?

It would be presumptuous to pretend to know, but Microsoft at the currently irrationally depressed level appears to be poised to out-perform the broad index and is preparing itself to leave behind its reactive ways for what we all know to be a lucrative communications market.

Just ask Verizon (VZ).

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

Additional disclosure: I may add additional shares of MSFT

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