This past week was one that I initially thought would have its outcome determined by our rational reaction to earnings reports. It was to be another busy week on the earnings front and the previous two weeks had been fairly orderly, despite some occasional intrusion by world events in far away places.
Regardless of the outcome of earnings reports, there is something fundamentally calming when the market actually reacts in a rational way to fundamental bits of data.
But by the time we found ourselves awaiting the release of this month’s Employment Situation Report a certain kind of speculation returned after an absence of a few months and the calm was disrupted.
Is good news now bad again and bad news now good? If you already have trouble distinguishing between good and evil, the contortions necessary to interpret economic events is especially difficult when the rules aren’t clear.
After a few months of more traditional beliefs that good was good and bad was bad, in light of the nuances that may have been contained in the FOMC statement from earlier in the week, many were beginning to question how reality should be perceived.
Perhaps it was the realization that the Federal Reserve wasn’t sounding quite as dovish with its most recent FOMC statement release and that interest rates might rise sooner than stock traders had anticipated. That set off concerns regarding Friday’s Employment Situation Report and the worries that too much growth on the employment front would accelerate the Federal Reserve’s decision to foster higher interest rates.
Which as we all know is bad for stocks, as long as the market has read the same play book and decides to act in a predictable fashion.
The return of paradoxical thinking was made possible by a sudden 317 point loss on Thursday, which of course, initiated a new round of speculation regarding whether this was the beginning of the long awaited correction.
However we start interpreting news going forward this was definitely a week with lots of it, in very sharp contrast to those past few months of predominantly boredom filled weeks punctuated by some isolated, but contained crises here and there.
While the last few months have had their own unique issues, this week was unusual due to the coincidental convergence of so many events. So confusing, in fact, that the usually assured “talking heads” weren’t really able to decide what the root cause was for Thursday’s sudden drop. Lack of agreement isn’t unusual, but lack of assuredness is and there was clear uncertainty within and between pundits. Was it Argentina? Was it more Russian sanctions? Both?
What they could all agree upon and incessantly discussed, was the rise in volatility, always marveling at the rise in percentage terms, without regard to its still very low level. While most investors don’t spend too much time thinking about volatility, it is what drives option premiums, so it is very important to those buying or selling option contracts and for sellers increasing volatility offers greater cushions for market declines accompanying the volatility increase.
The new week begins with the feeling that bargains may be had, but there has to be some concern that the week ending selling was done on fairly heavy trading volume. Additionally, the attempt to rally on Friday afternoon ended up fizzling, as for once traders may have decided to live by age old words of wisdom and not go long into a weekend of uncertainty.
As with most weeks set to begin with uncertainty, I split the difference. Always trying to maintain a cash reserve for new weekly purchases, usually supplemented by weekly assignments, I expect to wait for some cues as trading begins the week, but am not adverse to reducing those cash reserves in response to what may have been good news for those on the hunt for bargains.
As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.
The coming week may be a battle of deciding upon stocks that may be exposed to the various perils that face the world and those that may be somewhat protected. While staying away from danger may have its appeal, there may be some opportunities even in the danger zone now that we all know where it resides.
At the moment Best Buy (BBY) faces some perils, but it’s not too likely that Argentina nor Russia will have much impact on its immediate fortunes. The same is likely true for Gaza and Ukraine.
What Best Buy may be concerned about, and the market took note, was what its CEO observed regarding tablet sales. Such a decrease, if accurate, and which appears to be consistent with Apple’s (AAPL) recent earnings release and sales reports, at least doesn’t place concern on an incapable, but willing consumer, which would have ramifications far beyond Best Buy and far beyond its sale of tablets.
However, with shares driven below $30, I’m ready to take ownership again after having recently had shares assigned at that strike level.
With its own earnings still about 4 weeks away there may be some opportunity to wring some benefit from ownership again in advance of that date.
Cypress Semiconductor (CY) and Texas Instruments (TXN) have taken two different paths, with perhaps Best Buy’s observation having greater impact on sales at Cypress Semiconductor, which among its product lines, the sale of touch screens is quite important. Fortunately, while tablet sales may be falling, smartphone sales continue to grow and Cypress Semiconductor stands to benefit from that continued phenomenon. Trading near its near term low of $10 makes it an attractive purchase using either an August or September 2014 option contract. If utilizing the September contract and not assigned, I would likely consider waiting until the October 2014 contracts appeared, in order to have a better opportunity to collect both premiums and a healthy dividend.
I recently purchased shares of Texas Instruments (TXN) immediately before its ex-dividend date, but a sudden reversal and surge in its share price made
it too tempting to resist early exercise and the holding lasted only a single day.
By the time the week ended, Texas Instruments shares followed the same path as many others and ended at a price that made me glad that the shares had been assigned. However, now I’m enticed by shares simply for the option premium and chance to recover some of the recent drop from its near term highs, as “old technology” which was the market’s darling earlier in the month has settled back somewhat.
Although Sinclair Broadcasting (SBGI) relies on people watching their broadcasts on television sets, it probably doesn’t care very much about the fortunes over at Best Buy, as long as sales of Aereo have been halted, as they have following the Supreme Court’s decision. That decision sent shares sharply higher as for days before the announcement shares alternated between sharp gains and losses in anticipation of a decision.
It isn’t a very glamorous stock but after having given up some of those gains I would consider a position or selling put options after it announces its earnings prior to the open of trading on Wednesday. With an upcoming dividend later in the month, if opening a new position I might consider concomitant sale of the September 2014 monthly call contract.
Like Best Buy, Las Vegas Sands (LVS) is another stock that I would like to re-buy as it trades near the $72.50 range. After some negative news from Macao, a major revenue center for Las Vegas Sands, the price has come down following some recent gains, as the price has seemed to establish a near term floor at about $72.50, while it trades well below its highs from earlier in the year. I’ve owned shares three times in the past two months and while the shares have moved, they’ve gone virtually nowhere. That is an ideal characteristic for a stock considered as a vehicle for a covered call strategy.
British Petroleum (BP) which is ex-dividend this week is one of those companies that could face additional risk as Russia may take steps in response to European Union sanctions which could then disproportionately have impact in the energy sector.
Over the past month shares have shown uneasiness in British Petroleum’s position in Russia. While those shares are still well above where I last owned them, I think that the current sell-off offers the opportunity to establish a position that may begin to benefit from increased volatility as its option premiums begin to reflect some of the politically induced uncertainty. The position may require some nursing as the situation develops, but in the past few years few stocks have shown an ability to climb back from the depths better than British Petroleum.
While Argentina has had seven previous debt defaults somehow this most recent one comes as a surprise, despite the protracted and high profile legal proceedings in the United States that pitted an aggressive hedge fund against the government of Argentina.
Money center banks, such as JP Morgan Chase (JPM) didn’t fare terribly well toward the latter part of the week after news came through regarding the likelihood of Argentina being in technical default of its debt obligations. Again, the surprise was lacking, so perhaps the only surprise should have been that shares would reflect surprise.
Otherwise, for me it is an opportunity to repurchase shares that were just assigned a week earlier at $58. Ultimately, that is the real essence of a covered call strategy, looking for opportunities to re-purchase the very same stocks, ideally at lower prices, while still being able to milk premiums and occasionally dividends from the shares. JP Morgan has consistently played along and I don’t envision the current decline as being deeply rooted.
With speculation that interest rates may be rising sooner than initially believed the thesis had helped to lift MetLife (MET) earlier in the year should once again come into the equation. Higher interest rates tend to be better for insurance companies and MetLife is certainly poised to benefit from an increase, with earlier better than later, even though such time frame concerns have tempered market optimism.
The timing may be just right for an investment as shares are down about 5% from its recent high following earnings. Even better is that shares are ex-dividend this week.
Finally, like most others sitting on appreciated real estate assets, I look at Zillow (Z) as a form of pornography, often salivating as I see the value it believes my home is worth and sometimes checking the site twenty times an hour, especially on those days that the stock market isn’t doing it for me.
Let’s just leave it at that, but you do have to admire the business model and its primacy, as it announced its buyout of competitor Trulia (TRLA) using its shares as currency and without any cash component.
Having dropped about 11% in the past week after about a 20% rise the previous week, the options market is implying a nearly 9% move upon earnings, down to a lower boundary of about $130. However, a 1% weekly ROI can possibly be achieved at a $126 strike level, representing an 11.2% decline if a weekly put contract is sold.
While I like those odds, this may be one of those potential trades that I would more likely consider executing after earnings, through the sale of put contracts, if shares plunge following earnings.
Hopefully the coming week will return to the normal boredom of summer and leave us only considering things like earnings, same store sales and merger/buyout news.
My brain hurts after this past week and needs a break from too much news and too much acrobatic thinking.
Traditional Stocks: Cypress Semiconductor, JP Morgan, Sinclair Broadcasting, Texas Instruments
Momentum: Best Buy, Las Vegas Sands
Double Dip Dividend: British Petroleum (8/6), MetLife (8/6)
Premiums Enhanced by Earnings: Zillow (8/5 PM)
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 co
vered 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.
July 28 – August 1, 2014