Weekend Update – August 31, 2014

You really can’t blame the markets for wanting to remain ignorant of what is going on around it.

When you’re having a party that just doesn’t seem to want to end the last thing you want to do is answer that unexpected knock on the door, especially when you can see a flashing red and blue light projected onto your walls.

The recent pattern has been a rational one in that any bad news has been treated as bad news. The market has demonstrated a great deal of nervousness surrounding uncertainty, particularly of a geo-political nature and there has been no shortage of that kind of news lately.

On the other hand, the market has thrived during a summer time environment that has been devoid of any news. Over the past four weeks that market has had its climb higher interrupted briefly only by occasional rumors of geo-political conflict.

Given the market’s reaction to such news which seemingly is accelerating from different corners of the world, the solution is fairly simple. But it was only this week that the obvious solution was put into action. Like any young child who wants only to do what he wants to do, the strategy is to hear only what you want to hear and ignore the rest.

Had the events of this week occurred earlier in the summer we might have been looking at another of the mini-corrections we’ve seen over the past two years and perhaps more. The additive impact of learning of Russian soldiers crossing the Ukraine border, Great Britain’s decision to elevate their Terror Alert level to “Severe” and President Obama’s comment that the United States did not yet have a strategy to  deal with ISIS, would have put a pause to any buying spree.

Instead, this week we heard none of those warnings and simply marched higher to even more new record closes, even ignoring the traditional warning to not go into a weekend of uncertainty with net long positions.

To compound the flagrant flaunting the market closed at another new high as we entered into a long holiday weekend. As we return to trading after its celebration the incentive to continue ignoring the world and environment around us can only be reinforced when learning that this past month was the best performing month of August in more than 10 years.

Marking the fourth consecutive week moving higher, the July worries of spiking volatility and a declining market are ancient history, occurring back in the days when we actually cared and actually listened.

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

Bank of America (BAC) may be a good example of ignoring news, although it could also be an example of  the relief that accompanies the baring of news. The finality of its recent $17 billion settlement stemming from its role in the financial crisis was a spur to the financial sector.

Shares go ex-dividend this week and represent the first distribution of its newly raised dividend. While still nothing worthy of chasing and despite the recent climb higher, the elimination of such significant uncertainty can see shares trading increasingly on fundamentals and increasingly becoming less of a speculative purchase as its beta has plunged in the past year.

With thoughts of conflict related risk continuing to be on my mind there’s reason to consider positions that may have some relative immunity to those risks. This week, however, the reward for selling options is unusually low. Not only is the extraordinarily depressed volatility so adversely impacting those premiums, but there are only four days of time value during this trade shortened week. Looking to use something other than a weekly option doesn’t offer much in the way of relief from the low volatility, so I’m not terribly enthusiastic about spending down cash reserves this coming week, particularly at market highs.

Still, there can always be an opportunity in the making. With the exceptions of the first and last selections for this week, like last week I’m drawn to positions that have under-performed the S&P 500 during the summer’s advance.

^SPX ChartThere was a time that Altria (MO) was one of my favorite stocks. Not one of my favorite companies, just one of my favorite stocks, thanks to drawing on the logic of the expression “hate the sin and not the sinner.”

Back in the old days, before it spun off Philip Morris (PM) it was one of those “triple threat” stocks. It offered a great dividend, great option premiums and the opportunity for share gains, as well. Even better, it did so with relatively little risk.

These days it’s not a very exciting stock, although it still offers a great dividend, but not a terribly compelling option premium, especially as the ex-dividend date approaches. However, during a time when geo-political events may take center stage, there may be some added safety in a company that is rarely associated with the word “safe,” other than in a negative context.

Colgate Palmolive (CL) isn’t a terribly exciting stock, but in the face of unwanted excitement, who needs to add to that fiery mix? Last week I added shares of Kellogg (K), another boring kind of position, but both represent some flight to safety. 

Trailing the S&P 500 by 8% during the summer, shares of Colgate Palmolive could reasonably be expected to have an additional degree of safety afforded from that recent decline and that adds to its appeal at a time when risk may be otherwise be an equal opportunity destroyer of assets.

YUM Brands (YUM) and Las Vegas Sands (LVS) both have much of their fortunes tied up in China and both have come down quite a bit during the summer.

YUM Brands has shown some stability of late and I would be happy to see it trading in the doldrums for a while, as that’s the best way to accumulate option premiums. WHile doing bu
siness is always a risk in China, there is, at least, little concern for exposure to other worldwide risks and YUM may have now weathered its latest food safety challenge.

Las Vegas Sands, on the other hand, may not yet have seen the bottom to the concerns related to the vibrancy of gaming in Macao. However, the concerns now seem to be overdo and expectations seem to have been sufficiently lowered, setting the stage for upside surprises, as has been the situation in the past. As with concerns regarding decreased business at YUM due to economic downturns, once you get the taste for fast food or gambling, it’s hard to cut down on their addictive hold.

T-Mobile (TMUS), despite the high profile it maintains, thanks to the efforts of its CEO, John Legere, has somehow still managed to trail the S&P500 during the summer. This past week’s comments by parent Deutsche Telecom (DTEGY) seemed to imply that they would be happy to sell their interests for a $35 price on shares. They may be willing to take even less if a potential suitor would also take possession of John Legere, no questions asked.

I think that in the longer term the T-Mobile story will not end well, as there is reason to question the sustainability of its strategy to attract customers and its limited spectrum. It needs a partner with both cash and spectrum. However, since I don;t particularly look at the longer term picture when looking for weekly selections, I’m interested in replacing the shares that were assigned this past week, as its premium is very attractive.

Whole Foods (WFM) is another position that I had assigned this past week, while I still sit on a much more expensive lot. On the slightest pullback in price, or even stability in share price, I would consider a re-purchase of shares, as it appears Whole FOods is finding considerable support at its current level and has digested a year’s worth of bad news.

In an environment that has witnessed significant erosion in option premiums, Whole Foods has recently started moving in the opposite direction. Its option premiums have seen an increase in price, probably reflecting broader belief that shares are under-valued and ready to move higher. Although I’ve been adding shares in an attempt to offset paper losses from that more expensive lot, I believe that any new positions are warranted on their own at this level and would even consider rolling over positions that are likely to be assigned in order to accumulate these enriched premiums.

I currently have no technology sector holdings and have been anxious to add some. With distrust of “new technology” and “old technology” having appreciated so much in the past few months, it has been difficult to find suitable candidates.

Both SanDisk (SNDK) and QualComm (QCOM) have failed to match the performance recently of the S&P 500 and may be worthy of some consideration, although they both may have some more downside risk potential during a period of market uncertainty.

Among challenges that QualComm may face is that it is not collecting payment for its products. That is just another of the myriad of problems that may confront those doing business in China, as QualComm, and others, such as Microsoft (MSFT), may not be receiving sufficient licensing fee payments due to under-reporting of device sales.

In addition, it may also be facing a challenge to its supremacy in providing the chips that connect devices to cellular networks worldwide as Intel (INTC) and others may be poised to add to their market share at QualComm’s expense.

For those believing that the bad news has now been factored into QualComm’s share price, having resulted in nearly a 7% loss as compared to the S&P 500 performance, there may be opportunity to establish a position at this point, although continued adverse news could test support some 6% lower.

SanDisk certainly didn’t inspire much confidence this week as a number of executives and directors sold a portion of their positions.

I don’t have any particular bias as to the meaning of such sales. SanDisk’s price trajectory over the past year certainly leaves significant downside risk, however, the management of this company has consistently steered it against a torrent of  pessimistic waves, as it has survived commoditization of its core products. The risk of share ownership is mitigated by its option premium, that has resisted some of the general declines seen elsewhere, perhaps reflective of the perceived risk.

Finally, Coach (COH) has recently been in my doghouse, despite the fact that it has been a very reliable friend over the course of the past two years. But human nature being what it is, it’s hard to escape the question “what have you done for me lately?”

That’s the case because my most recent lot of Coach was purchased after earnings when it fell sharply and then surprised me by continuing to do so in a significant manner afterward, as well. Unlike with some other earnings related drops over the past two years this most recent one has had an extended recovery period, but I think that it is finally getting started.

The timing may be helped a little bit with shares going ex-dividend this week. That dividend is presumably safe, as management has committed toward maintaining it, although some have questioned how long Coach can continue to do so.

I choose not to listen to those fears.

Traditional Stocks: Altria, Colgate Palmolive, QualComm, Whole Foods, YUM Brands

Momentum:  Las Vegas Sands, SanDisk, T-Mobile

Double Dip Dividend: Bank of America (9/3), Coach (9/5)

Premiums Enhanced by Earnings: none

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

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Week in Review – August 25 – 29, 2014

 

Option to Profit Week in Review
August 25 – 29,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
3 / 5 5 2 3  / 2 0  / 0 0

    

Weekly Up to Date Performance

August 25 – 29, 2014

New purchases for the week surpassed the unadjusted S&P 500 by 1.0% and the adjusted index by 1.5% during a week that the market was again faced with no news and elected to ignore other potential news, as setting new closing rtecords on three of its trading days.



New positions opened this week went 1.8% higher, while the overall market was 0.8% higher on unadjusted basis and 0.3% higher on an adjusted basis, as it was largely unchanged for the final three days of the week.

This week existing positions returned to outperforming the broader market, as those positions rose by 1.3% in absolute terms and 0.5% in relative terms.

Performance of closed positions continued to out-perform the S&P 500 performance by 1.7%. They were up 3.6% out-performing the market by 89.0%. 

Another week of no real news and more new records to show for it, as the market actually seemed to be ignoring what was going on in the world.

Realizing that news could have detrimental impact, based on previous incidents around the world, ignoring what is going on seems like a great idea and may have application to all phases of life.

Barely a month ago we were all worried about how large the imminent correction would be and were wailing about the spike in volatility, but as has been the case time and time again over the past few years the slightest weakness became a signal to jump in.

All in all, this was a good week, despite not having made too many trades.

As is sometimes the case, it can be a question of having either the right or the wrong stocks at any given period of time, but in the longer term those sort of things should equilibrate. This week it was just a fortunate combination of events that helped to outpace the market.

This week the existing collection of stocks out-performed the market, but received some help from a number of ex-dividend positions and some additional income flowing in from option premiums.

Weeks such as this one, that aren’t overly strong in the broader market are the ideal ones if covered positions can be created.

Fortunately, this week, while not overly abundant in trades did appear to have enough of them in the various categories to be able to put together a nice performance.

The one thing missing was an adequate number of rollovers.

While no positions expired there were relatively few positions to be rolled over and even fewer next week as just a single existing position is set to expire next week.

With a good number of assignments this week and cash returned from the expiration of puts sold there is money available for new positions to be created next week and there certainly is a need to create some new positions to populate the weekly expiration list.

However, the premiums, just as they were this week, are at very low levels that will be even lower next week, as there are only 4 trading days of time premium.

That situation creates some challenge in finding positions that can offer a total return of income that seems to be commensurate with the risk. This past week that was mitigated by also looking for dividends, but there aren’t quite as many attractive plays next week.

While I always think about risk I also am less inclined to add too much until its clear that the immediate geo-political risk isn’t going to create havoc on asset value. That also means looking preferentially for positions that may not care too much abou
t what is happening in someone else’s backyard.

As trading opens on Tuesday, as much as I would like to get some weekly expiring positions there may be reason to look for opportunities to bypass the September 5th expiration and go straight to the September 12, although the extra week won’t offer too much additional advantage in the premium, as long as volatility remains at this low level. Further, with a fair number of positions already set to expire at the end of the September monthly cycle I really don’t want to add too many to that list and be put at undue risk by having so many vulnerable on a single day.

So with markets at new highs the challenge continues to be finding some that haven’t shared in the same glory, while not having any fundamental flaws to have deserved their fate.

In the meantime, I hope everyone has a happy and health Labor Day holiday and gets to enjoy an additional day of rest and relaxation.

 

 

 













 

 

 





 

     

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:   HAL,K, SBGI

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  none

Calls Rolled over, taking profits, into extended weekly cycle:  HAL (9/12)

Calls Rolled over, taking profits, into the monthly cycleCHK

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

Calls Rolled Up, taking net profits into same cyclenone

New STO:  BX, C, PBR, PBR, PBR

Put contracts expiredANF, BBY

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned:  C, TMUS, WFM

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 PositionsHFC (8/25 $0.50 Special dividend), HFC (8/28 $0.32), K (8/28 $0.49), LO (8/27 $0.62), SBGI (8/26 $0.16)

Ex-dividend Positions Next Week:  COH (9/5 $0.34), MOS (9/2 $0.25)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, CHK, CLF, COH, FCX, IP, JCP, LULU, LVS, MCP, MOS,  NEM, PBR , PFE, RIG, TGT, WFM, WLT (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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Daily Market Update – August 29, 2014

 

  

 

Daily Market Update – August 29, 2014 (8:30 AM)

The Week in Review will be posted by 6:00 PM and the Weekend Update will be posted by Monday 12 Noon.

 

Today’s possible outcomes or trades, include:

 

Assignments: C

Rollovers:  HAL, TMUS, WFM

Expirations: ANF (put), BBY (put), CHK,

 

The following positions were ex-dividend this week: HAL, HFC (special), HFC, K, LO, and SBGI

The following positions are ex-dividend next week COH (9/5), MOS (9/2)

 

Trades, if any, will be attempted to be made prior to 3:30 PM EDT, where possible.

 

 

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Daily Market Update – August 28, 2014 (Close)

 

  

 

Daily Market Update – August 28, 2014 (Close)

While the market will be closed this coming Monday in celebration of Labor Day, there was a nearly 20 minute period of time yesterday when the S&P 500 stayed in a 0.10 range. You would have been excused for believing that the Labor Day holiday had already arrived.  I actually rebooted my computer twice, because I thought the program had frozen.

Still the S&P 500 was able to set another new record, using every bit of the 0.10 point trading range to close precisely that amount higher.

This morning gave initial appearances of taking a break from the past three weeks of recovery from the transient decline that had everyone preparing for Armageddon and introducing the word “volatility” into their lexicons.

With the release of GDP statistics and Jobless claims a little later in the morning the futures had not changed very much. They continued to point to a lower open, despite some improvement in the GDP, after a couple of very disappointing reports earlier in the year.

With economic news not being much of a factor lately, the only real thing that the market has responded to has been geo-political news and in the past week it seems to have turned a blind eye to events, or at least their reporting, perhaps after having learned from a series of reactions and over-reactions.

Somewhat amazingly the market hasn’t seemed to care about the vary same kind of news that had so consistently upended it in recent weeks, even when there appears to be independent corroboration, thereby elevating the state from that of rumor.. Despite some dour news in the Ukraine – Russia conflict, there appears to be no real reaction, with an apparent expectation that everyone will come out singing praises of peace.

I don’t know how realistic that image is, but as summer ebbs and a Russian winter looms there is certainly bound to be a different kind of offensive that will tax everyone’s credulity regarding Russian intentions and that can only further depress European economies.

On a positive note that could see a shift into US equities, but that’s all in the future and lately the market seems to have stopped discounting the future as it used to do back in the old days.

Other than a shift of money, either from Europe or from the mythical money that may be on the sidelines it’s hard to see what the catalyst will be for the next phase higher. Listening to those who continue to pound on the “historically low P/E multiple,” one has to wonder why they haven’t factored in EPS data that’s been elevated from widespread and aggressive buyback programs that have served to keep that multiple low.

With this week now having entered into that period that I usually start looking for rollover opportunities, but with relatively little to potentially roll over, and still having cash to spend, there is still a possibility of adding some new positions with either a very short term time frame or more likely, with expirations next week, which currently has only a single position set to expire. That was the situation behind today’s sale of Abercrombie and Fitch puts after earnings were released.

Since next week is already a shortened one who knows what opportunities will pop up and just how puny the premiums might be unless those opportunities happen very early in what’s left of the week. So with that in mind, I would like to see that kind of opportunity present itself as this week hasn’t had too much in the way of option income generating activity, although there have been more than the usual number of dividend payers.

The latter, however, doesn’t really count until those funds actually get deposited. For now, they’re only deductions from net asset value, but during a phase of very low option premiums they are more important than ever in trying to develop a predictable stream of income from existing or new assets, as long as their value gets recovered by shares over a short time frame.

 

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Daily Market Update – August 28, 2014

 

  

 

Daily Market Update – August 28, 2014 (9:00 AM)

While the market will be closed this coming Monday in celebration of Labor Day, there was a nearly 20 minute period of time yesterday when the S&P 500 stayed in a 0.10 range. You would have been excused for believing that the Labor Day holiday had already arrived.  I actually rebooted my computer twice, because I thought the program had frozen.

Still the S&P 500 was able to set another new record, using every bit of the 0.10 point trading range to close precisely that amount higher.

This morning is giving initial appearances of taking a break from the past three weeks of recovery from the transient decline that had everyone preparing for Armageddon and introducing the word “volatility” into their lexicons.

With the release of GDP statistics and Jobless claims a little later in the morning the futures had not changed very much. They continued to point to a lower open, despite some improvement in the GDP, after a couple of very disappointing reports earlier in the year.

With economic news not being much of a factor lately, the only real thing that the market has responded to has been geo-political news and in the past week it seems to have turned a blind eye to events, or at least their reporting, perhaps after having learned from a series of reactions and over-reactions.

Somewhat amazingly the market hasn’t seemed to care about the vary same kind of news that had so consistently upended it in recent weeks, even when there appears to be independent corroboration, thereby elevating the state from that of rumor.. Despite some dour news in the Ukraine – Russia conflict, there appears to be no real reaction, with an apparent expectation that everyone will come out singing praises of peace.

I don’t know how realistic that image is, but as summer ebbs and a Russian winter looms there is certainly bound to be a different kind of offensive that will tax everyone’s credulity regarding Russian intentions and that can only further depress European economies.

On a positive note that could see a shift into US equities, but that’s all in the future and lately the market seems to have stopped discounting the future as it used to do back in the old days.

With this week now having entered into that period that I usually start looking for rollover opportunities, but with relatively little to potentially roll over, and still having cash to spend, there is still a possibility of adding some new positions with either a very short term time frame or more likely, with expirations next week, which currently has only a single position set to expire.

Since next week is already a shortened one who knows what opportunities will pop up and just how puny the premiums might be unless those opportunities happen very early in what’s left of the week. So with that in mind, I would like to see that kind of opportunity present itself as this week hasn’t had too much in the way of option income generating activity, although there have been more than the usual number of dividend payers.

The latter, however, doesn’t really count until those funds actually get deposited. For now, they’re only deductions from net asset value, but during a phase of very low option premiums they are more important than ever in trying to develop a predictable stream of income from existing or new assets, as long as their value gets recovered by shares over a short time frame.

 

 

 

 

 

 

 

 

 

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