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.
There 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.
August 25 – 29, 2014
