Weekend Update – November 30, 2014

An incredibly quiet and uneventful week, cut short by the Thanksgiving Day holiday, saw the calm interrupted as a group of oil ministers from around the world came to an agreement.

They agreed that couldn’t agree, mostly because one couldn’t trust the other to partner in concerted actions what would turn out to be in everyone’s best interests.

If you’ve played the Prisoner’s Dilemma Game you know that you can’t always trust a colleague to do the right thing or to even do the logical thing. The essence of the game is that your outcome is determined not only by your choice, but also by the choice of someone else who may or may not think rationally or who may or may not believe that you think rationally.

The real challenge is figuring out what to do yourself knowing that your fate may be, to some degree, controlled by an irrational partner, a dishonest one or one who simply doesn’t understand the concept of risk – reward. That and the fact that they may actually enjoy stabbing you in the back, even if it means they pay a price, too.

Given the disparate considerations among the member OPEC nations looking out for their national interests, in addition to the growing influence of non-OPEC nations, the only reasonable course of action was to reduce oil production. But no single nation was willing to trust that the other nations would have done the right thing to maintain oil prices at higher levels, while still obeying basic laws of supply and demand, so the resulting action was no action. The stabbing in the back was probably in the minds of some member nations, as well.

If the stock market was somehow the partner in a separate room being forced to make a buying or selling decision based on what it thought the OPEC members would do, a reasonable stock market would have expected a reduction in supply by OPEC members in support of oil prices. After all, reasonable people don’t stab others in the back.

That decision would have resulted in either buying, or at least holding energy shares in advance of the meeting and then being faced with the reality that those OPEC members, hidden away, whose interests may not have been aligned with those of investors, made a decision that made no economic sense, other than perhaps to pressure higher cost producers.

And so came the punishment the following day, as waves of selling hit at the opening of trading. Not quite a capitulation, despite the large falls, because panic was really absent and there was no crescendo-like progression, but still, the selling was intense as many headed for the exits.

While fleeing, the question of whether this decision or lack of decision marked the death of the OPEC cartel, meaning that oil would start trading more on those basic laws and not being manipulated by nations always seeking the highest reward.

The more religious and national tensions existing between member nations and the more influence of non-member nations the less likely the cartel can act as a cartel.

The poor UAE oil minister at a press conference complained that it wasn’t fair for OPEC to be blamed for low oil prices, forgetting that once you form a cartel the concept of fairness is already taken off of the table, as for more than 40 years the cartel has unfairly squeezed the world for every penny it could get.

With the belief that the death of OPEC may be at hand comes the logical, but mistaken belief that the ensuing low oil prices would be a boon for the stock market. That supposition isn’t necessarily backed up by reality, although logic would take your mind in that direction.

As it happens, rising oil prices, especially when due to demand outstripping supply makes for a good stock market, as it reflects accelerating economic growth. Falling oil prices, if due to decreased demand is certainly not a sign of future economic activity. However, we are now in some uncharted territory, as falling prices are due to supply that is greater than demand and without indication that those falling prices are going to result in a near term virtuous cycle that would send markets higher.

What we do know is that creates its own virtuous cycle as consumers will be left with more money to spend and federal and state governments will see gas taxes revenues increase as people drive more and pay less.

The dilemma now facing investors is whether there are better choices than energy stocks at the moment, despite what seems to be irrationally low pricing. The problem is that those irrational people in the other room are still in control of the destinies of others and may only begin to respond in a rational manner after having experienced maximum pain.

As much as I am tempted to add even more energy stocks, despite already suffering from a disproportionately high position, the lesson is clear.

When in doubt, don’t trust the next guy to do the right thing.

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

When Blackstone (NYSE:BX) went public a number of years ago, just prior to the financial meltdown, imagine yourself being held an a room and being given the option of investing your money in the market, without knowing whether the privately held company would decide to IPO. On the surface that might have sounded like a great idea, as the market was heading higher and higher. But the quandary was that you were being asked to make your decision without knowing that Blackstone was perhaps preparing an exit strategy for a perceived market top and was looking to cash out, rather than re-invest for growth.

Had you known that the money being raised in the IPO was going toward buying out one of the founders rather than being plowed back into the company your decision might have been different. Or had you known that the IPO was an attempt to escape the risks of a precariously priced market you may have reacted differently.

So here we are in 2014 and Blackstone, which is the business of buying struggling or undervalued businesses, nurturing them and then re-selling them, often through public markets, is again selling assets.

Are they doing so because
they perceive a market peak and are securing profits or are they preparing to re-invest the assets for further growth? The dilemma faced is across the entire market and not just Blackstone, which in the short term may be a beneficiary of its actions trying to balance risk and reward by reducing its own risk.

The question of rational behavior may be raised when looking at the share price response to Dow Chemical (NYSE:DOW) on Friday. In a classic case of counting chickens before they were hatched I was expecting my shares to be assigned on Friday.

While I usually wait until Thursday or Friday to try to make rollovers, this past shortened week I actually made a number of rollovers on Tuesday, which were serendipitous, not having expected Friday’s weakness. The rollover trade that didn’t get made was for Dow Chemcal, which seemed so likely to be assigned and would have offered very little reward for the rollover.

Who knew that it would be caught up in the energy sell-off, well out of proportion to its risk in the sector, predominantly related to its Kuwaiti business alliances? The question of whether that irrational behavior will continue to punish Dow Chemical shares is at hand, but this drop just seems like a very good opportunity to add shares, both as part of corporate buybacks as well as for a personal portfolio. With my shares now not having been assigned, trading opportunities look beyond the one week horizon with an eye on holding onto shares in order to capture the dividend in late December.

The one person that I probably wouldn’t want to be in the room next to me when I was being asked to make a decision and having to rely on his mutual cooperation, would be John Legere, CEO of T-Mobile (NYSE:TMUS). He hasn’t given too much indication that he would be reluctant to throw anyone under the bus.

However, with some of the fuss about a potential buyout now on hiatus and perhaps the disappointment of no action in that regard now also on hiatus, shares may be settling back to its more sedate trading range.

That would be fine for me, still holding a single share lot and having owned shares on 5 occasions in the past year. Its option volume trading is unusually thin at times, however, and with larger bid – ask spreads than I would normally like to see. At its current price and now having withstood the pressures of its very aggressive pricing campaigns for about a year, I’m less concerned about a very bad earnings release and see upside potential as it has battled back from lower levels.

EMC Corp (NYSE:EMC) may also have had some of the takeover excitement die down, particularly as its most likely purchaser has announced its own plans to split itself into two new companies. Yet it has been able to continue trading at its upper range for the year.

EMC isn’t a terribly exciting company, but it has enough movement from buyout speculation, earnings and speculation over the future of its large VMWare (NYSE:VMW) holding to support an attractive option premium, in addition to an acceptable dividend.

I currently own sh
ares of both Coach (NYSE:COH) and Mosaic (NYSE:MOS). They both are ex-dividend this coming week. Beyond that they also have in common the fact that I’ve been buying shares and selling calls on them for years, but most recently they have been mired at a very low price level and have been having difficulty breaking resistance at $38 and $51, respectively.

While they have been having difficulty breaking through those resistance levels they have also been finding strength at the $35 and $45 levels, respectively. Narrowing the range between support and resistance begins to make them increasingly attractive for a covered option trade, especially with the dividend at hand.

I’ve been sitting on some shares of General Motors (NYSE:GM) for a while and they are currently uncovered. I don’t particularly like adding shares after a nice rise higher, as General Motors had on Friday, but at its current price I think that it is well positioned to get back to the $35 level and while making that journey, perhaps buoyed by lower fuel prices, there is a nice dividend next week and some decent option premiums, as well. What is absolutely fascinating about the recent General Motors saga is that it has been hit with an ongoing deluge of bad news, day in and day out, yet somehow has been able to retain a reasonably respectable stock price.

Finally, it’s another week to give some thought to Abercrombie and Fitch (NYSE:ANF). That incredibly dysfunctional company that has made a habit of large price moves up and down as it tries to break away from the consumer irrelevancy that many have assigned it.

Abercrombie and Fitch recently gave some earnings warnings in anticipation of this week’s release and shares tumbled at that time. If you’ve been keeping a score card, lately the majority of those companies offering warnings or revising guidance downward, have continued to suffer once the earnings are actually released.

The options market is anticipating a 9.1% price move this week in response to earnings. However, it would still take an 11.8% decline to trigger assignment at a strike level that would offer a 1% ROI for the week of holding angst.

That kind of cushion between the implied move and the 1% ROI strike gives me reason to consider the risk of selling puts and crossing my fingers that some surprise, such as the departure of its always embattled CEO is announced, as a means of softening any further earnings disappointments.

Traditional Stocks: Blackstone, Dow Chemical, EMC Corp, General Motors

Momentum: T-Mobile

Double Dip Dividend: Coach (12/3), Mosaic (12/2)

Premiums Enhanced by Earnings: Abercrombie and Fitch (12/3 AM)

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 – November 24 – 28, 2014

 

Option to Profit Week in Review
 
November 24 – 28,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
4 / 4 1 4 0  /  0 3  / 0 0

    

Weekly Up to Date Performance

November 24 – 28, 2014

New positions opened this week out-performed the S&P 500 on both an adjusted and unadjusted basis bu 0.8% this week, as the overall market was only 0.2% higher for the week and the newly opened p[ositions ended the week 1.0% higher.

With no positions assigned this week the 2014 total of 191 positions have finished 3.6% higher, as compared to 2.0% for the S&P 500 for the comparable holding periods. That 1.6% advantage represents a 83.1% difference in return.

For those with relatively little energy exposure this was a good week, but for those with an equal or disproportionate exposure, Friday was a brutal day, as the week may have ended on a note of capitulation for those stocks.

Other than speculation about what was going to come out of Thursday’s OPEC meeting there was very little going on this week and the market had essentially nothing to respond to, as even the GDP, revisions and all, was a non-event.

It had been a nice and calm week with some reasonable trading activity and results leading up to the Thanksgiving Day holiday.

With Thursday a day off, there was reason to think that today would be like many other Fridays after Thanksiving over the years and would be the beginning to what is traditionally an above average end to the year.

Instead, the week ended as a really good example of the power of individual sectors and how they can obscure what was happening in the much broader market.

The week ended in dramatic form, continiong a consistent erosion in oil prices over the past month.

While energy, in all forms, had an unbelievable response to OPEC’s decision to do nothing, it’s dramatic drop may not have met the traditional criteria to have been considered as having capitulated, its price drop was still stunning.

That drop basically came all at once anjd didn’t detriorate in any meaningful or frenzied way during a thankfully shortened trading session.

While logic says that  such a sharp drop in energy prices has to be good, that’s not necessarily the case for US markets.

Where this drop differs from other drops is that it is likely that growing supply has outpaced demand. In cases where the market has fallen as energy prices have fallen it has been because declining demand led to an over-supply.

So maybe this time around the market will do the logical thing and head higher as input costs can head significantly lower, unless companies are tied down by long term and expensive commodity contracts.

Of course, for the end use, the prospects of significantly decreased energy costs, esepcially as winter is here, could translate into more cash avalilable for discretionary spending. Who knows, decreased gas prices could also lead to more driving and increased federal and state gas tax revenues, too.

Those benefits, though, may not come close to offsetting share price declines that were really ourtageous today.

It was a good week to have opebned some new positions and it was also a good time to have executed some early rollovers, rather than waiting for the end of the week. Just witness the very hard decline in Dow Chemical today, that probably due to its petrocjhemical businesses was hit as hard as any other company solely in the energy sector. The move in Dow Chemical took it from being a “sure thiing” assignment, to one that ened the week far out of the money, but a logical stock to have some seller’s remorse kind of rebound.

Next week may see some continuing fallout from OPEC’s unexpected, but logical decision to not cut supply, at least in the energy sector. It would be reasonable, though, to see some broader buying, both to be part of that traditional December rally and in the belief that falling energy prices are good for the economy, which in turn must be good for markets.

The latter has to remain to be seen, but I’m not adverse to adding some new positions next week, but again may look at trying to further populate the December 12, 2014 expiration, as there are already a fair number of positions expiring next week.

While this was a frustrating week if holding energy, it was at least a nice week for collecting lots of dividends. Next week will be the same and I increasingly do not want to put dividends at risk for early assignment as the contiinuing decrease in volatility is also reducing the reward from trying to double dip.

For now, I’m happy to have a few extra hours of no trading this week, especially after the demonstration of how punishing the market can be, even when the events aren’t really surprising.

I’m hopeful that the drop in oil and the entire sector will in fact be the same as a capitulation, but  that’s now far from certain as the dynamics of supply are very complex and the players are all, rightfully, distrustful of one another.

 

For anyone who has ever played the Prisoner’s Dilemma game, that is exactly what the world is looking at now, as producers will jockey fro what they believe will bring them an optimal outcome.

The likelihood is that whatever they choose it will be good for us, as people, but not bnecessarily good for us as investors, with or without exposure to energy. 

 

   

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:   GDX, GME, JOY, LXK

Puts Closed in order to take profits:  none

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

Calls Rolled over, taking profits, into extended weekly cycle:  GDX (12/12), GME (12/12), LVS (12/12)

Calls Rolled over, taking profits, into the monthly cycle: none

Calls Rolled Over, taking profits, into a future monthly cyclenone

Calls Rolled Up, taking net profits into same cyclenone

New STO:  TMUS (12/12)

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned: none

Calls Expired:  BP, DOW, JOY

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions: MAT (11/24 $0.38), HFC (11/25 $0.50 Special Dividend), K (11/26 $0.49), LXK (11/15 $0.36), SBGI (11/26 $0.16)

Ex-dividend Positions Next Week:  JOY (12/2 $0.20), HFC (12/2 $0.32), MOS (12/2 $0.25), COH (12/3 $0.34), HAL (12/3 $0.18), NEM (12/3 $0.025)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, ANF, CHK, CLF, COH, FAST, FCX, GM, HAL, HFC, .JCP,  LULU, LVS, MCP, MOS,  NEM, PBR, RIG, 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 – November 28, 2014

 

  

 

Daily Market Update – November 28, 2014 (9:15 AM)

The Week in Review will be posted by 6:00 PM and the weekend Update will be posted by Noon on Sunday.

Today’s possible outcomes include:

Assignments: none

Rollovers:  DOW

Expirations:  BP, JOY

The following were ex-dividend this past week: ANF (11/28 $0.20), HFC (11/26 $0.50 Special Dividend), K (11/26 $0.49), LXK (11/25 $0.36), MAT (11/24 $0.28), SBGI (11/26 $0.16)

The following will be ex-dividend next week: COH (12/3 $0.34), HAL (12/3 $0.18), HFC (12/2 $0.32), JOY (12/2 $0.20), MOS (12/2 $0.25), NEM (12/3 $0.025)

Trades, if any, will be attempted to be made by 3:30 PM EST

 

 

 

 

 

 

 

 

 

 

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Daily Market Update – November 26, 2014 (Close)

 

  

 

Daily Market Update – November 26, 2014 (Close)

The weather is miserable on the east coast, including over the New York Stock Exchange and it is the day before Thanksgiving.

That has the makings for another really quiet day, even though some key economic reports are being released today. While there may not be many around to react to those reports these kind of low volume day can become aberrations in terms of the moves seen.

The futures, though, give no indication of anything other than another in a series of very quiet trading days and when it was all over, the futures got it just right.

Although I don’t usually mind if the market stays in a narrow range over an extended trading period, I do like to see days when there are either strong moves higher or plunges lower, as long as they don’t come in a single direction in any kind of sustained period.  

While a series of flat days can leave you with the same net result as a series of flat days with equally sized intervening surges and plunges, the latter is much more preferable, as it increases the volatility and offers some trading opportunities.

For now, the only real opportunity that I would like is to have a chance to take advantage of any surge higher and sell some calls on uncovered positions.

Today was just another day when that kind of hope had no chance of becoming reality.

Lately, it has simply been one flat trading day after another. While there have been a couple of days of rallies in the making, none of them had staying power. That has been especially true for the energy sector, that has had a number of days when it appeared as if there might be some kind of a breakout higher, only to see relatively sudden reversals  across  the board.

Today didn’t look like it would lead to very much trading and my wife must have been fully aware of that, as she left me a list of things that I needed to get done by tomorrow, as somehow the guest list keeps expanding.

While difficult and boring, my mind was still on whatever it was that today might bring. Like yesterday, if any opportunities did arise for early rollovers, I would have liked to take them. That opportunity did come for rolling over the $53 lot of JOY in order to still be able to have a chance at next week’s dividend.

Next week, just as this one, there are a number of positions going ex-dividend and I would like to retain as much of that income as possible, sometimes foregoing option premiums, as the premiums are very low and may not warrant the risk of losing the position.

For now, if you’re in the cold rain or in the snow stay warm and safe in enjoyment of Thanksgiving with friends and family. If you’re traveling today, I hope it is an easy and uneventful trip.

But If you’re someplace nice and warm, set another couple of places. I don’t mind abandoning our guests and letting them fend for themselves.

 

 

 

 

 

 

 

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Daily Market Update – November 26, 2014

 

  

 

Daily Market Update – November 26, 2014 (8:00 AM)

The weather is miserable on the east coast, including over the New York Stock Exchange and it is the day before Thanksgiving.

That has the makings for another really quiet day, even though some key economic reports are being released today. While there may not be many around to react to those reports these kind of low volume day can become aberrations in terms of the moves seen.

The futures, though, give no indication of anything other than another in a series of very quiet trading days.

Although I don’t usually mind if the market stays in a narrow range over an extended trading period, I do like to see days when there are either strong moves higher or plunges lower, as long as they don’t come in a single direction in any kind of sustained period.  

While a series of flat days can leave you with the same net result as a series of flat days with equally sized intervening surges and plunges, the latter is much more preferable, as it increases the volatility and offers some trading opportunities.

For now, the only real opportunity that I would like is to have a chance to take advantage of any surge higher and sell some calls on uncovered positions.

Lately, however, it has simply been one flat trading day after another. While there have been a couple of days of rallies in the making, none of them had staying power. That has been especially true for the energy sector, that has had a number of days when it appeared as if there might be some kind of a breakout higher, only to see relatively sudden reversals  across  the board.

Today doesn’t look like it will lead to very much trading and my wife must be fully aware of that, as she’s left me a list of things that I need to get done by tomorrow, as somehow the guest list keeps expanding.

For now, though, my mind is still on whatever it is that today may bring. Like yesterday, if any opportunities do arise for early rollovers, I would like to take them. That may include rolling over the $53 lot of JOY in order to still be able to have a chance at next week’s dividend.

Next week, just as this one, there are a number of positions going ex-dividend and I would like to retain as much of that income as possible, sometimes foregoing option premiums, as the premiums are very low and may not warrant the risk of losing the position.

For now, if you’re in the cold rain or in the snow stay warm and safe in enjoyment of Thanksgiving with friends and family. If you’re traveling today, I hope it is an easy and uneventful trip.

But If you’re someplace nice and warm, set another couple of places. I don’t mind abandoning our guests and letting them fend for themselves.

 

 

 

 

 

 

 

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